Yahoo Finance/Brian Cheung
Lower-for-longer rates from the Fed point to a weaker-for-longer dollar
The greenback has been on a slide since COVID-19 arrived in the United States, and a wonky change in the Federal Reserve’s approach to inflation may apply further downward pressure on the dollar in the future.
The U.S. dollar has depreciated notably over the course of the summer, with the U.S. dollar index (DX=F) falling to 92 at the end of August, a two-year low. Although the dollar has staved off further declines, forex analysts are warning that a weak U.S. dollar may be here to stay.
ING’s economics team says that a “significant bearish factor” for the dollar is the Fed’s intention to allow inflation to “moderately” overshoot its 2 % target. The framework change means the central bank is likely to hold pat on near-zero interest rates for even longer.
“It’s easy to lose track of chapters in the global currency war, but the Fed’s switch to average inflation targeting certainly looks like one of them,” ING wrote September 4.
Lower interest rates for longer could mean lower inflows into U.S. dollar-denominated investments. Interest rate differentials (when the return on deposits are greater in one country over another) have narrowed with the Fed now pinning U.S. rates near zero for the foreseeable future. Before COVID-19, the Fed had interest rates noticeably higher than in the Eurozone and Japan, where central banks had been backed into negative interest rates.
Market Watch/Barry Eichengreen
The COVID-19 pandemic is about to enter its most treacherous phase
Washington won’t be there to support the economy this time, as infections inevitably rise as people head back indoors.
April marked the most dramatic and, some would say, dangerous phase of the COVID-19 crisis in the United States. Deaths were spiking, bodies were piling up in refrigerated trucks outside hospitals in New York City, and ventilators and personal protective equipment were in desperately short supply. The economy was falling off the proverbial cliff, with unemployment soaring to 14.7%.
Since then, supplies of medical and protective equipment have improved. Doctors are figuring out when to put patients on ventilators and when to take them off. We have recognized the importance of protecting vulnerable populations, including the elderly. The infected are now younger on average, further reducing fatalities. With help from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, economic activity has stabilized, albeit at lower levels.
Oil prices add to losses as supplies swell amid weak demand
Oil prices extended declines on Friday, under pressure from a surprise rise in U.S. stockpiles and ongoing weak demand from the coronavirus pandemic.
Brent crude was down 8 cents, or 0.2%, at $39.98 a barrel by 0110 GMT, after falling nearly 2% on Thursday, while U.S. crude was off by 2 cents at $37.28 a barrel, having fallen 2% in the previous session.
Both major benchmarks were headed for a second week of declines.
In the United States, stockpiles rose last week against expectation as refineries slowly returned to operations after production sites were shut down due to storms in the Gulf of Mexico and wider region.
“Crude production is starting to return following a couple of storms, but a weak demand outlook and the start of maintenance season will keep the pressure on oil prices,” said Edward Moya, senior market analyst at OANDA.
Crude inventories in the United States rose 2.0 million barrels last week, against expectations for a 1.3 million-barrel decrease in a Reuters poll.
In a further bearish sign, traders were starting to book tankers again to store crude oil and diesel, amid a stalled economic recovery as the Covid-19 pandemic continues unabated.