Despite Fed’s Turn to Hawkish Policy, DXY May Not Soar Without Yellen’s Effort

With Yellens pressure again, Powell and members of the Federal Reserve made a compromise by opting for a hawkish monetary policy. Yellen said early June that interest increase is a good thing for the Fed, implying Powell would be replaced at the end of his term of office next February, if he still pays no attention to the inflation with a continuously chilled and negative attitude.

Although the Feds monetary policy stays the same without a sharp turn, the statement by the Fed indicates that a better public wealth situation and vaccination has curbed the spread of Covid-19, and without showing the expression that crisis slowed the economy in the statement, the reduce of bond purchasing would be put on the agenda. In terms of inflation forecast, the Fed is likely to greatly increase the rate from 2.4% to 3.4%. The “Dot-plot” chart also indicates that a full interest increase scheduled in 2014 will be set out early in 2023, and seven members of the Fed state that next year will witness two times of interest increase.

It is estimated that the Fed may suggest the time of suspending the quantitative easing monetary policy at the next meeting, and the suspending plan is possibly to start officially early next year. In addition to, more attention should be paid to this week when more than 12 Fed members will deliver speeches. It is believed that Powell will take the lead to turn to a hawkish policy with their supports. Meanwhile, the future monetary policy still depends on the performance of economic data. So theres no doubt that the inflation rate continues rising due to the sustained oil prices. Therefore, the Fed will carry out a tight monetary policy without hesitation, if US economic growth performs stably and well.

The DXY increases sharply after the change of the Fed‘s policy, and definitely the recovery of DXY benefits from the continuing hawkish monetary policy of the Fed. However, the soaring DXY can’t be seen without Yellen‘s effort to cut financial deficit by conducting fax increase plan as soon as possible. And keeping the deficit and negative equity under control contributes to the DXY’s spike, making DXY challenge again the high level of 93.437 this year, as well as testing above another high level of 94.742. Whether to challenge above the high level of 103 in 2020 will be dependent on that whether the central banks in Japan and Europe still keep a dovish monetary policy. In a word, the DXY has enough opportunities to break above the level of 103, with the short-term dovish monetary policy by the banks in Japan and Europe, the suspending quantitative easing policy by the Fed and the fax increase policy by U.S. Treasury.