At a time when major global central banks maintained status quo of interest rates, the US Federal Reserve has not just raised rates but also hinted at further rate hikes in 2018, making the dollar index move higher against the basket of other currencies.
The US Federal Reserve raised rates for the second time in 2018 by 25 basis points, while European Central Bank (ECB), Bank of Japan (BOJ) and Bank of England (BOE) maintained status quo.
The US Fed also hinted at two other rate hikes in 2018, if supported by robust economic data. Favourable economic data, strong employment numbers and inflation ranging above central bank’s target of 2 per cent nudged the Fed to increase the key interest rates in June this year.
Meanwhile, investors lost confidence in the European Central Bank which said it would close its hallmark bond purchase scheme by the end of 2018, but ruled out any interest rate hike in the immediate future. Growth in the Eurozone also hit its slowest pace in more than a year in the first quarter of 2018 at 0.4 per cent against 0.7 per cent in the last quarter of 2017, which did not support ECB’s cause.
Bank of England adopted a wait and watch strategy in its May meeting as it did not see any improvement in the economy. The central bank of England kept interest rates unchanged at 0.50 per cent. UK’s economy slowing down in the second quarter of 2018 after a strong Q4 2017 and Q1 2018 has further dissipated the chances of rate hike in 2018.
Recent trade brawls, which are expected to damage global growth, are also adding to the weakness of global currencies. Under these circumstances, we see the dollar appreciating as and when the US economy reports stronger economic numbers.
The author is a fundamental research analyst at Karvy Forex and Currencies Pvt Ltd