Dollar appreciates as the Fed will have to try harder to control inflation – Commerzbank

FXStreet Insights Team FXStreet

Economists at Commerzbank analyze the future path of USD exchange rates.

USD valuation depends on US inflation and on the short-term US interest rates

“USD valuation? That depends on US inflation and also on the short-term US interest rates. Because the USD can be sold and bought short-term too. But because the FX market looks ahead, so that a USD move that can be expected for the future will arise now, it is yields with a longer maturity after all that are decisive.”

“Real 5Yx5Y yields’ spread compared with the corresponding euro zone yields has narrowed recently (when EUR/USD principally appreciated). That is now over. That means: the market does not expect higher inflation, but envisages that the Fed will have to try harder to control it. That is why the Dollar appreciates; and not because higher US yields increase the effectiveness of current US monetary policy.”

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