Date: 19 Jun 2017

The arguments about how hawkish or not the US Federal Reserve currently is, or if emerging US economic data justifies the kind of monetary policy path that Fed Chief Janet Yellen outlined last week. But one thing is for certain. Current Fed monetary policy settings do not lend themselves to any material expansion of the monetary base. Additionally, if the US yield curve continues to flatten, nor is there any major incentive for US banks to expand credit. Low net interest margins are not the bankers’ friend.

Foreign exchange traders, as is always evidenced in the justified emphasis on where the Fed is setting rates, focus on the price of US dollars as it is influenced by the prevailing official interest rate and its expected direction of travel. There is less attention, probably because it’s much harder to identify, on the price of US dollars as it is affected by their availability. Yet that availability or its relative absence, as was graphically illustrated during the Global Financial Crisis, can be telling. Going forward, if the availability of US dollars is going to be constrained by the implications of Fed policy, traders may logically conclude that the only way is up for the greenback.