Last week, the U.S. dollar rebounded on higher bond yields and strong optimism following the hawkish FOMC minutes of Wednesday. According to the Fed, the labor market remained strong and economic activity continued to rise at a solid rate, both backed by the growing household spending, solid business fixed investment and low unemployment rate.
However, the committee highlighted the low inflation rate, saying while market-based measures of inflation have increased in recent months, inflation is still running below a 2% target. This explained why the long-term inflation expectations are little changed.
Still, experts are projecting three to four rate hikes in 2018, especially with the U.S. dollar now correlated with the treasury yield once again and 10-year treasury yield rising to almost 3% after reaching a four year high of 2.9537 percent on Wednesday and predicted by both Bank of America and Goldman Sachs to reach 3.25% by year-end.
But the rising U.S. deficit and increasing capital flight from the U.S. equity to Europe still remain a concern, and may further disrupt the dollar’s outlook. However, investors are looking towards Fed’s Feb. 27 testimony by the new Chair Jerome Powell at the House Financial Services Committee in Washington, D.C. for a clue on interest rate hikes and economic standing. A hawkish view could further boost fixed income attractiveness and strengthens the U.S dollar economic outlook against emerging currencies.
In the Euro-area, the services PMI unexpectedly declined to 56.7 in February, down from 58 recorded in January. Despite the unexpected results in the first two months of the first quarter, the numbers showed the economy is growing at a quarterly rate of 0.9%. Therefore, economic growth in the region remained strong in 2018 and is likely to compel the European Central Bank to stop its asset purchasing program by the end of the year. But the Italian election and the German coalition remained a concern.
In Japan, the Yen strengthens against the U.S. dollar as investors capitalized on Japan’s eight straight quarters of consecutive expansion over Europe’s 2017 strong economic growth rate. This suggests investors doubt the possibility of the Euro sustaining its bullish run against the greenback above 1.2569, especially with the fiscal stimulus and growing uncertainty ahead of Italy’s election of March 4.
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