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Updated 06:20 23/05/18

US Dollar resurgence looks set to halt as inflation slows down

Liam Sheasby

By Liam Sheasby, News Editor

16 May 2018

The US Dollar’s surprise resurgence of late looks set to slam on the brakes after the latest economic figures released for April showed a slowdown of inflation. Federal Reserve figures show just a 0.1% rise in inflation – now up to 2.5% - which was a decline from the 0.2% growth experienced in March.

The reduced inflation rate matches economic deceleration across the western world, with the UK and the Eurozone reporting similar slowing in both economic growth and inflation. The lack of inflation is likely to put the Federal Reserve off from raising interest rates as often as initially planned this year, with the planned four rate rises now looking more like three or even two. The Bank of England reneged on their long-expected rate rise for May due to similar sluggish economic figures in Britain.

Inflation isn’t necessarily a bad thing given it’s a natural by-product of a growing economy, but the important factor is to balance wage growth against it due to the increased cost of living. The US is experiencing a combination of 17-year low unemployment while suffering from higher freight costs, rising petrol prices, and the current trade tariff battle between the US and China. The present 2.7% wage growth is slightly ahead of inflation, but if this were to change then the US economy could hit a major stalling point.

Image courtesy of Bloomberg. The Dollar Spot Index (DXY) showing recent US Dollar growth and the latest plateau.

USD recently experienced its fastest growth in value in 18 months, a jump not seen since Donald Trump’s victory in the US Presidential Election in November 2016, but with the latest inflation data the Dollar and Treasury Yields both fell back, with stocks feeling the benefit.

Wall Street strategists and analysts alike are now warning of a switch to bearish conditions for the Dollar once again, citing big drops in used car sales (largest drop since 2009) and less flights taken (largest drop in demand since 2014) as warning signs of consumer concern.

The Dollar moved sideways in the last week, with the steady hold on the Dollar Spot Index giving businesses and major economies alike a reprieve to get their bearings. The DXY index, visible here on the Bloomberg website, shows the US Dollar is ever so slightly growing but that it is on a trend curve and about to hit peak. The future of the spot index is expected to be downhill, with many on Wall Street predicting a drop from the current figure of just over 93 points down to 81 by the end of next year. The expectation is that the Euro, which is currently languishing, will have its own resurgence and rally as the US economy moves away from its short-term stimulus benefits.

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