The dollar drifted this morning as hopes of higher interest rates were balanced by concerns about the escalating trade dispute between the US and China.
America’s central bank, the Federal Reserve, and its chairman Jerome Powell, will conclude a two-day meeting later today and are expected to announce what will be the eighth hike in the key federal funds rate since December 2015.
With both inflation and employment are running well above the Fed’s targets, the only excuse for holding off on a gradual but steady rise in the cost of borrowing would be if the US economy were judged to be so fragile that any rate rise could de-rail its recovery.
Another ratchet in trade dispute
There is little sign of that at present, and the Fed is committed to a measured tightening of monetary policy.
This morning, the dollar traded in a narrow range against the . Early gains had been lost by late morning in London, with the US currency down 0.02% at €0.8497. It was higher against , up 0.13% at £0.7596, but lost 0.05% against the , at 132.8450 yen.
This is the probability that higher rates will push the dollar up further, as investors seek dollar-denominated investments. A stronger dollar against the Chinese currency, the yuan, will make Chinese goods cheaper for American consumers, widening the very trade deficit that started the tariff war.
President Donald Trump, who claims China is guilty of dumping goods on the American market, of possible currency manipulation and alleged theft of copyrights and patents, has been at a meeting of the United Nations in New York, where he had discussions with Japanese prime minister Shinzo Abe.
It is reported the two men agreed to promote trade between their two countries.
Steady rise in rates
Meanwhile, the Fed meeting has put a spotlight on the gradual return to more normal monetary conditions in the US. As the Great Recession struck in 2008, the Fed slashed interest rates in the December of that year to a range of 0%-0.25%, an emergency measure designed to prevent a full-blown depression.
Most recently, the range was lifted to one of 1.75%-2% on 14 June.
The inflation measure that excludes food and energy prices, on account of their volatility, is the one targeted by the Fed. It stood at 2.2 % in the year to August, above the Fed’s 2% target.
Unemployment as a percentage of the workforce was 3.9% in August. Although the Fed does not publish a target, it is believed to view a rate of 4.5% as representing “maximum employment”.