May 26, 2024

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Jackson Hole A Boost to the US Dollar – Opinion Thomas D Galloway

Jackson Hole A Boost to the US Dollar – Opinion Thomas D Galloway



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Comment Thomas DeGalloway



It’s 11:30 am today

Jerome Powell, chairman of the US Federal Reserve Bank, emphasizes the strength of the US economy. Powell still sees interest rates rising. Christine Lagarde, president of the European Central Bank (ECB), insists on a ‘data-driven approach’ rather than looking at the cards. Japan and China are struggling to strengthen the dollar

The world’s central bankers gathered last Friday for the annual Jackson Hole Symposium. At the American ski resort, the fight against inflation and how to keep interest rates low were again high on the agenda. Europe, the United States and the United Kingdom are following the same trend, with core inflation falling steadily and core inflation (which ignores more volatile components such as food and fuel) proving more persistent. However, there are important differences in what drives higher interest rates among the economies of the G7 countries. In the United States, the economy is still operating at full capacity, which is not the case in Europe and the UK.

Thus, in this context, Powell’s and Lagarde’s speeches were also far removed. Powell patted himself on the back for the progress made, but in the same breath pointed to the unexpected strength of the economy. He specifically pointed to GDP, high consumption and the housing market. If data in these categories should surprise positively in the near future, this is a signal that interest rates should be much higher. After all, a resilient economy carries the risk of re-accelerating inflation, a situation that has already occurred in the past. After the speech, the market placed the probability of a pause in September, followed by a 66% rate hike in November. This appears to be the central bank’s new function: adjusting pace and buying more time to analyze economic data.

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Inflation figures that matter most to ECB policy
ECB President Christine Lagarde does not look at her cards in her speeches. He continued to insist that the next meeting would be suspended or extended depending on economic data. Inflation figures for August due out next Thursday will be very important in this regard. A higher figure (market expectation 5.3%) could trigger a rate hike at the next ECB meeting on September 14. It therefore has a positive effect on the Euro/Dollar exchange rate.

The European economy is far worse than the US. Germany is particularly notable in this regard, after a six-month recession, which only managed to beat stagnation in the second quarter of the year. What is seen as a bright spot is that the deteriorating economic outlook often dampens the demand side of ‘supply and demand’. So it can have a stabilizing effect on inflation.

Asian countries with the opposite problem
Two Asian countries where the word inflation does not scare us are China and Japan. After all, both countries face the opposite problem, deflation and falling price pressures. As a result, central banks keep interest rates artificially low with the aim of stimulating economic activity. The People’s Bank of China (PBOC) recently unexpectedly implemented an interest rate cut. This difference in policy is also reflected in the local currency. The CNY has been one of the worst performing currencies this year and the Japanese Yen is also under strong pressure.

New Bank of Japan President Kazuo Uede did not comment on the exchange rate, but said disappointing price growth meant current policies would continue unabated.