The Forex
and other markets have been well-prepared for the initiation of a new interest
rate cycle of rises in the U.S. The first of these is widely expected to be
announced at the end of the December Federal Open Market Committee meeting, which
concludes on this coming Wednesday, the 18th. This rise will crystallise
the divergence between U.S. monetary policy and that of the next most important
global currency bloc, the Eurozone. This divergence began with the so-called
tapering of U.S. Quantitative Easing, which was finally accomplished in October
of 2014. The Eurozone, while also employing the low interest rate tool of
economic enhancement, is only now getting into its stride in terms of Q.E.
This
divergence can be seen as the driver of continuing weakness in the Euro as
against the US dollar. However, the Fed has also been at pains to emphasise
that once the rate tightening cycle starts, it will only be implemented very
slowly and in small increments. There is also nothing to say that it might not
even be put into reverse from time to time. Such a climate can only provide a
brake to Single Currency depreciation against the U.S. dollar.
The argument for a continuously strengthening
dollar
But now a
closely argued piece in the Australian “Business Spectator”, by Victoria
Theiberger, entitled “The
Fed’s tightening path may jolt sanguine investors” (it is behind a paywall
but readers might think it worthwhile to pony up the small amount required)
maintains that the rate rise regime in the U.S. is going to strengthen during
the coming year rather than weaken. This is based on the belief that the
rotation of voting members of the FOMC will bring far more hawkish members into
a position where they can directly influence events; that U.S employment growth
is robust and improving to a degree that might be underappreciated at present;
and that low interest rates are actually now a drag on the economy rather than
a stimulus. Thieberger rationalises this last thesis by stating that the
near-zero rates have sharply increased the cost of retirement, meaning that the
very many retirees in the US have had to save harder and for longer in order to
achieve the same income when they finish their working careers. Some economists,
such as Drew Matus of UBS, believe, for this reason, that “… the first few rate
hikes may cause an acceleration in economic activity rather than acting as a restraint”.
If this
turns out to be the case, the Fed will grasp the opportunity to get interest
rates back quickly to what had been regarded as “normal”, prior to the establishment
of what many are seeing as the “new normal” of near-zero rates (When you hear
that term becoming mainstream, you can be pretty sure that the market is
getting ready to create yet another surprise for the unwary).
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