Regardless of US Inflation, The Dollar Will Keep Cooling Down

Traders on foreign exchange markets may be looking forward to a much more relaxed time than their counterparts on other markets as a result of the expectation that any upward adjustment in price pressures will not justify the dollar's gains ahead of Wednesday's US inflation data.

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A lack of confidence in the Federal Reserve to continue its tightening cycle even when the Federal Reserve is open to higher interest rates is one of the reasons investors have been wary of investing in the dollar. All this despite last week's stronger-than-expected payrolls driving up Treasury yields.

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A note from Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, stated that the US dollar would weaken in the coming months due to the eroding US growth rates and interest rate premium relative to the rest of the world,

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Almost ten percent of the Bloomberg Dollar Spot index has been down since its record high reached in September, when the Federal Reserve slowed the pace of raising interest rates. Traders expected that central banks in the Eurozone and the British pound would raise cash rates over the next six months, while the Fed is likely to remain on hold until later in the year to lower borrowing costs. The euro and pound surged in price during the past month as traders expected central banks there to raise cash rates.

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There is an expectation that the Fed will hike again next month, which could halt the dollar's downward trend in the short-term, according to TD Securities analysts led by Mark McCormick. In the months ahead, we expect the dollar to undergo a deeper correction, so if the dollar rallies, we would take advantage of that as an opportunity to resell the stock."

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It is no secret that fear gauges for bonds and equities have gone up this week as investors prepare for the possibility of a rapid swing in those markets following Wednesday's CPI release. While the dollar is seen to be declining despite the data, JPMorgan's gauge of the volatility of developed market currencies continued to decline for another week, indicating that the downward trend for the dollar could extend.