The Fed will continue exerting a crucial influence on the US dollar’s exchange rates according to Esther Reichelt, analyst at Commerzbank. However she noted that near-term, there is little to suggest a stronger dollar. “This could influence other central banks in their decisions aiming to weaken their home currencies in order to give both economic activity and inflation a lift”. Key Quotes “In the week after the US employment report, the data calendar is fairly empty as usual. But the Fed has a rather busy schedule in the coming week – besides the release of the March meeting minutes there will be numerous speeches by FOMC members. Though little fresh news is to be expected after the past week’s speeches, signals from the Fed will remain the dominant driver of the US dollar.” “Even if incoming data surprises positively, it should by and large only serve to confirm the Fed’s baseline scenario for the real economy – and we know what this means for monetary policy: Two rate hikes this year and four the next, this is what the famous “dots” reflect. The market currently expects only one move in each year. But even good US data and a resulting rise of the market’s interest rate expectations should do little to help the dollar.” “After all, the baseline scenario of the Fed – or at least that of chair Janet Yellen – envisages that the US dollar does not appreciate any further. Yellen explicitly indicated this last Wednesday in a speech which attracted much attention in the fx market: While she expects inflation to return to the Fed target of 2%, this is based on the assumption that there will be no furthers swings in the oil price and the dollar. In the market’s opinion Yellen has thereby confirmed that a stronger dollar will keep the Fed acting (very) cautiously until it feels more certain about its inflation outlook – and that takes time. We thus see our view confirmed that the US dollar will settle roughly at current levels for the time being.” “Near-term, there are therefore no reasons for a stronger dollar, and this is bad news for the G-10 central banks which still rely on a weak currency to stoke economic activity through higher exports or push inflation up through rising import prices.” “New Zealand’s central bank has already lowered its interest rates again, pointing to the considerable appreciation of the New Zealand dollar. The Australian central bank could follow suit next week. The Fed-induced weaker dollar casts doubt on the chances that such a policy will be successful. In the future, the ECB may not be the only central bank whose expansionary measures have little effect on the exchange rate.” For more information, read our latest forex news.