The World Became Tired of Strong Dollar

Strong dollar is chronic evil for America. By now, dollar index has reached the psychological level of 100, and all attempts to leave it have been unsuccessful
This week, FOMC meeting will monopolize general attention, although American rates are becoming less interesting for the market. Last week, all the key persons made their public statements: Fischer, Bullard, Lagarde, Mester - all of them have nurtured prices before the event. It is clear that rate increase in June or September is considered as the settled issue. We are still to hear how fast it will go and what rate will finally be set. "Philologists" assessing the text of the FRS protocol for the word "patience" will pose as the main analysts again. By using her informational pressure, Yellen is trying to release their Central Bank in order to do it at any moment that FRS will consider as "suitable". Incredible dollar growth against the background of not very positive data add uncertainty.

Strong dollar is chronic evil for America. By now, dollar index has reached the psychological level of 100, and all attempts to leave it have been unsuccessful. Bad growth and low inflation are also the consequences of dollar growth and pressure on exports; that is why FRS predictions regarding them, will be, most likely, revised towards decreasing. Most of global companies traditionally make loans in US dollars, and strengthening of the greenback triggers a new wave of debt crises. America hardly needs that. For instance, the situation with strong dollar/weak euro simply helps Europe to export the lion's share of its problems to the US. American salaries do not grow, employment market is rather weak, capital flees from Europe to the US, local industry can't support competitive ability. And we shouldn't even mention oil prices.

The USA has reached the ceiling of its borrowing, and if the US Congress does not raise its debt limit, funding of the federal government, even taking into consideration reduction of state programs, will end on December 31, 2015; after that we can expect (theoretically) a technical default again. It is a universally known fact that the US is skillfully manipulating its own statistics, which allows to make decorations about the strength of the American economy in the midst of the global economy slowdown. For now, we can see only decrease of budget deficit; however, the need for new loans is growing. GDP growth does not lead to the increase of the taxable base, and advertised reduction of unemployment level (it is 5.5% now) does not reflect the real picture. Studying the structure of the value, we can see that it goes down at the expense of natural (not only) dropout of people from the economically active category (from 65.2% to 62.8% in 5 years). Because of that, the growth of employment level does not at all mean real income and general improvement of the situation. Besides the labor market, the Central Bank is usually responsible for price dynamics. One more FRS decisions indicator is characteristic as an example of effective statistical manipulation - inflation calculation technique. In the USA, calculation of Core CPI (basic index of consumer prices) includes the cost of rent, which is not included in the similar European indicator. So, if we "even out" the technique, the US situation will turn out to be much worse, moreover, the cost of rent, including that pertaining to industry, grows much faster in Europe. This way, as much as the American bull can be aggressive, there are enough grounds for delay with rate increase. We shouldn't make bets until inflation becomes obvious, reasoned, and inevitable. It appears that Yellen has prepared an essay particularly on this topic for the following couple of meetings.

The Bank of Japan today's meeting leaves previous key positions; however, disappointment caused by the text of American protocols and Yellen's statement can trigger USD/JPY sell-offs (penetration of support at 120.9 - 121.10 can be possible then), and "hawk" sentiments and penetration of 121.60 will lead to stabilization of a bull trend. FRS meeting can push EUR/USD pair above 1.07, although the pair has worked out the main expectations. It is believed that large option barriers in the zone from 1.0620 - 1.0750 will remain until the beginning of the meeting. Besides, there is one more moment in the calendar. SNB will give an assessment of its credit and monetary policy on March 19, and Thomas Jordan is planning a press-conference. The expectations from another SNB rate decrease are assessed as 40/60. Last franc's blow on the market is still in memory; that is why it is mandatory to watch euro/franc cross-rate.

作者: Navsher Bartash,
ForexChief Currency strategist