Comments on Interest Rate Hikes Heighten Inflation Fears, USD Hits a Record High
Speaking at the Atlantic magazine's Future Economic Summit on Tuesday, US Treasury Secretary Yellen said interest rates may have to be raised to rein in the excessive growth of the US economy, driven in part by trillions of dollars in government stimulus spending. The comments on raising interest rates "added fuel" to the turbulent trading day, with the market worried that the Federal Reserve might scale back its economic stimulus measures earlier, the comments on raising interest rates triggered sharp fluctuations in financial markets, US stocks dived at intraday highs, precious metals fell from rising to falling, and international oil prices continued to rise.
The dollar expanded to its highest level in two weeks, outperforming all other Gmur10 currencies. The pound, the Japanese yen and the Swiss franc were the strongest, with the New Zealand dollar and the Australian dollar leading the decline. Tuesday's rebound in the dollar index reversed Monday's decline, leaving the dollar 1% higher than the one-month low it hit last week. The dollar fell yesterday on a disappointing manufacturing survey. The dollar index, which measures the value of the dollar against a basket of other major currencies, rose 0.36 per cent to 91.28; it fell more than 2 per cent in April.
After Ms Yellen's speech, gold retreated from a nearly two-and-a-half-month high of 1799.11, falling more than 1 per cent to $1771 at one point, and a stronger dollar made gold less attractive to holders of other currencies. However, Suki Cooper, an analyst at Standard Chartered Bank, said: "given the easing of downside risks in the spot market, capital outflows from the exchange traded product (ETP) have begun to slow, and the dovish message from the Fed continues to skew the risk upside, and we continue to believe that the average price of gold in the second quarter is expected to be $1775 per ounce."
Interestingly, perhaps considering that her comments affected the market, Yellen made it clear at a meeting of the Wall Street Journal after hours that she was not predicting or recommending a Fed rate rise, saying that inflation was only temporary. I don't think it's going to be a problem for the US economy. Apart from some temporary increases in inflation in the coming months, the Fed believes that there will be no inflation problems, and the Fed has the tools to solve these problems. For structural reasons, interest rates are expected to remain low in the future. The former Fed chairman clarified that she did not think inflation would be a problem and did not predict or recommend raising interest rates, adding that interest rates were expected to remain low in the future. Not to mention, it is hard to imagine 10-year Treasury yields hovering around 160 basis points if the Fed's contraction and runaway inflation are seen by the market as a real threat.
Bloomberg said Yellen's statement was taken for granted by economists-interest rates are likely to rise as government spending increases and economic growth accelerates. Yellen's statement is also a rare comment from cabinet members on the outlook for interest rates, which usually distance themselves from the jurisdiction of the Federal Reserve, with the exception of the administration of former President Donald Trump. Some Fed watchers believe that Yellen, the former chairman of the Federal Reserve, is more likely to refer to the level of market interest rates in her interview than the policy rate.
Looking at the JRFX economic calendar, we see little risk of high-impact events, although several Fed officials will speak, which are likely to add some colour to growing inflation concerns and deflation speculation. In addition, ADP payrolls data are scheduled to be released tomorrow, usually as a harbinger of Friday's monthly non-farm payrolls report.
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