Strategist Keith Dzhakls, Societe Generale SA, talks about how the Forex has changed over the past few years - for AMarkets materials.
The expert believes that the main driver for the dollar - not nominal interest rates, and real. That is, interest rates, adjusted for inflation. This fact is not something new. Just this phenomenon more clearly crystallized in recent years. Correlation between 10-year Treasuries, inflation-protected (TRIPS), and the weighted index of the dollar is stronger than the relationship between real rates and nominal dollar index.
The best starting point when it comes to long-term currency trends - it is real interest rates and real interest rates on bonds. The yield provided by the real rate as a trigger for the dollar - a consequence of a long period of zero and negative rates in the range of key central banks. What is now important is that when the stakes are so low, it is easier to predict the dynamics of the asset over the long term than in the short-term. At the same time real interest rates mean more because nominal rates do not show sharp volatility. Inflation expectations are much more volatile. Excessive monetary stimulus by the central bank left the short-term nominal rates at a particularly shaky position with respect to long-term rates.
US real rates in a poor position, even despite the support of the Fed. This is the trend, which explains the drop in the dollar spot index - dollar spot index (DXY) for the past 3 months. And this decline has left the dollar index (US dollar index) somewhere near the border support. If the index does fall to the border, it will mean that the dollar went into a bearish trend.
What does all of this mean? Fed - not the best one for the dollar. Dollar strong only when other economies, real interest rates / yields decrease, and for the last 3 months of real rates in the US fell more strongly than in other economies. And in Japan, and all the interest rate increased.