BBH: U.S. Dollar Weakness Just Noise; Trump Doesn't Control Monetary Policy
(Kitco News) - The gold market is benefiting from a weaker U.S. dollar as President Donald Trump continues to criticize the Federal Reserve’s monetary policy. However, one investment firm sees the latest market moves as short-term noise.
Monday, in an interview with Reuters, President Trump reiterated that he was not “thrilled” that the Federal Reserve is raising interest rates. He added at the central bank should do more to help him boost the economy.
The U.S. dollar index continues to trade near a one-week low as investors continue to digest Trump’s latest reproach of current monetary policy. The index last traded at 95.60 points, down 0.32% on the day. Gold prices briefly pushed above $1,200 an ounce in overnight action. Comex December Gold continues hold on to modest gains near a one-week high, last trading at $1,197.30 an ounce, up 0.23% on the day.
Looking ahead, currency analysts at Brown Brothers Harriman said that they don’t expect to see material weakness in the U.S. dollar in reaction to the Trump’s comments. In a report Tuesday, the firm said that it does not see the Federal Reserve reversing course on monetary policy this year.
“From a larger perspective, we see President Trump's comments as not impacting U.S. rate expectations, which means that investors do not think the Fed's independence has truly been violated,” the analysts said. “We expect the Federal Reserve to largely ignore the President's statements. While verbal intervention can spur short-term movements in the currency market, the medium- and long-term drivers are the macro fundamentals. The divergence of monetary policy helps underpin the U.S. dollar.”
The analysts noted that the Federal Reserve remains the most hawkish. The European Central Bank is not expected to raise interest rates until the summer of 2019, the Bank of Japan continues to pursue extraordinary measures and the Bank of England can only raise interest rates slightly.
Trump’s comments are not impacting expectations ahead of the Federal Reserve’s September monetary policy meeting. Markets are pricing in a 96% chance that the central bank will raise interest rates by 25 basis points.
Markets also price in a 63% chance of a fourth rate hike in December.
While Brown Brothers Harriman is not convinced that a December rate hike is a given, they note that the central bank has room to raise interest rates.
“While we do not think that Fed will raise rates as much as the dot plots suggest, we do expect a few moves over the next 12 months, and if we are right, then we should be prepared for additional criticism by the administration,” the analysts said. “Given the pace of growth and inflation, monetary policy is not tight, even though rates have risen. Typically, the economic conditions would require higher interest rates. The Fed funds target is below inflation. That means the real Fed funds rate is negative nine years into an economic recovery and expansion. The 10-year yield is also below inflation.”