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What kind of dollar does the US need: weak or strong?

According to recent media reports, the Fed sharply boosted the scope of its asset purchases on the open market in early March due to fears of a collapse in the sovereign bond market after the ECB did the same. In line with the estimates of global investment bank JPMorgan Chase, aggregate purchases of government bonds by the Fed, the BoE, the BoJ and the ECB (under quantitative easing) since the beginning of 2021 have already reached 2/3 of the volume of purchases of similar assets for full-year 2020. The reason for the upsurge in QE volumes is due to a spike in government bond yields over the past month. Thus, 30-year US Treasury bond yields already exceed 2.3% and are closing in on 2.5%, although yield growth has been somewhat reined in by the Fed’s interventions.

So why are the Fed, other G7 central banks and the Eurozone doing this? One may recall that back in mid-February, ECB President Christine Lagarde called for an "expansionary” monetary policy. The global economy, including G7 economies, is struggling to recover from the crisis caused by the coronavirus pandemic. Although the exact reasons for the sharp rise in yields of what were previously considered as highly reliable government bonds of developed countries, and especially the United States, remain unclear, everyone understands that buying up bonds on the stock market by central banks actually involves pumping up the economy, including its real sector, with money. This is a policy that aims to jump-start an exit from the crisis, and which is now necessary to revive the real sector, which sustained especially serious damage during the lockdown of the Western services sector, while the reverse side of this policy spells an upward spiral in inflation. Given that for the US, the EU countries, the UK, and other developed countries, one of the main economic problems has been not inflation, but deflation, pumping money into the economy is regarded as a blessing, rather than a curse.

However, according to President of the Federal Reserve Bank of Chicago and a member of the Federal Open Market Committee Charles Evans, for the United States, a rise in inflation up to the Fed's target of 2% or even up to 3% is not a problem, but problems will begin if US inflation reaches 4%. At that point, the Fed might consider the possibility of raising the interest rate range, which currently stands at 0-0.25%, and this could trigger a decrease in the asset prices of developing countries and an increase in the dollar against global reserve currencies, not to mention the Russian ruble.

The DXY index has been trending higher since February 25, which almost coincided with the beginning of the Fed's monetary intervention, up 2.3% over that period. This could mean that FX markets are expecting the Fed to start tightening monetary policy when the target inflation level is reached. In light of this, a comment by US Commerce Secretary Gina Raimondo, who on Monday rejected calls for a weakening of the dollar, saying that a strong dollar was “good for America”, should be taken quite seriously.:


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