Value of the US dollar to continue trending downward – Charles Schwab

Economic growth is picking up as the vaccine rollout gains speed, commodity prices are heading higher, the government is proposing another large fiscal aid package and the Federal Reserve is pledging to keep its very easy monetary policy intact for the foreseeable future. Not surprisingly, inflation expectations are rising. According to economists at Charles Schwab the downtrend in the US dollar, if it is sustained, is also potentially supportive to rising inflation. 

Key quotes

“We expect to see an uptick in inflation over the next few months, but it’s likely to be fleeting. On a year-over-year basis, inflation will likely tick higher. However, getting inflation to hold sustainably above the Fed’s 2% target for core PCE likely will take another year or two, considering the large output gap.”

“When we look a few years down the road, the case for a move up in inflation grows stronger. The Fed’s easy monetary policy stance – when combined with the prospect for another round of fiscal relief of about $1 trillion igniting stronger demand, and a rebound in the economy as the vaccine rollout proceeds – could lay the groundwork for higher average inflation than we’ve experienced for the past decade.”

“On a trade-weighted basis, the dollar had been rising for about 10 years until last spring when the Fed shifted to its very easy policy stance. We expect it to continue moving lower as a result of the decline in real interest rates in the US and rising external deficits that need to be financed with foreign capital. A weaker currency should provide some support for higher growth and inflation.”