Current US dollar rally is a bear market correction – ING

The FOMC minutes did help glean a bit more on Fed thinking. The Federal Reserve is calm in the face of inflation upside, and no taper signals as of yet. Until there are much clearer signs that the Fed is prepared to take its foot off the accelerator, economists at ING Bank believe the current dollar rally is a bear market correction and that it does not need to push too much further ahead.

Key quotes

“The central tenant point from the Fed's minutes is no material change in tone – still dovish. At the same time the Fed has nodded approval for the December stimulus, and on the likely positives coming from vaccine effects on the economy in due course. “

“The Fed has shown no panic on inflation as of yet, acknowledging the likelihood for a ‘spring jump’, but also noting that the economy is far from where it needs to be. There is also no material evidence that the Fed is considering a near-term tapering, with conditions not likely to be met for some time, they suggest.”

“Not a whole lot for bonds to get excited about here. But at the margin there is a strong tint of a Fed that is indeed likely to take some inflation risk ahead, not seeing it as worrisome at this juncture, which reduces protection for long end rates, and should allow them to test higher.”

“Dollar bulls will struggle to find much from the FOMC minutes to support their cause. True, the Fed had more confidence in the medium-term outlook based on vaccine progress. But there were no signs of the Fed, at this stage, being concerned about the economy running too hot.”

“Until there are much clearer signs that the Fed is prepared to take its foot off the accelerator, we believe the current dollar rally is a bear market correction and that it does not need to push too much further ahead.”