The Dollar-Index (DXY) printed a new multi-year high at 105.65 yesterday after the previous high of 105.01 on May 13th. Particularly high US CPI numbers (8.6% YoY) from last Friday have shifted the market odds to a larger than originally expected hike of more than 50 basis points by the FED this european evening. But even if there is an increase of 75 bp or 100 bp, the huge negative real interest rate will not change for the time being.
(source: fxstreet.com)
In this respect, the current Dollar strength should be treated with caution in my opinion. There are other G10 Currencies out there, here I focus on Japanese yen and Swiss franc, which have higher real interest rates although there key policy rate is lower than the Federal Rate:
(own representation)
The DXY is mainly driven by the Euro, which is struggling with a similarly low real interest rate. And confidence in the Euro and its price stability will not rise if the ECB feels compelled to call a meeting due to rising peripheral yields, as happened today. A major Euro rally therefore remains less likely for the time being.
But for the Swiss franc and Japanese yen, I'm not sure the high Dollar valuation is justified. Ultimately, Dollar investors still have to reckon with losses in purchasing power. And I don't think they'll be looking at it for long. Do not get me wrong. The Dollar is in a rally and it is impossible to catch the top. But with a little differentiation between currencies, trading opportunities could arise today.
Good luck,
Sebbo
JPY key policy rate is -0.10%, not 0.30%. I'm sorry for the mistake. Think about tonight's BOJ interest rate decision!