The US Dollar is at an advantage against the Euro thanks to the Fed – Commerzbank

Whose monetary policy is more attractive? A comparison of the Fed and ECB shows the US Dollar is more attractive than the Euro, economists at Commerzbank report.

Dollar holds advantage over the Euro

“Fed Chair Jay Powell has pointed out that the Fed is aiming for a key rate level above inflation medium-term. That means the Fed will only stop hiking interest rates or lower them again once it can be sufficiently certain that inflation is easing notably. The impression the ECB is giving to observers is completely different. One gets the impression that Europe’s central bankers have to be forced by high inflation data to get them to hike rates. From the FX market’s point of view that means the Dollar is at an advantage against the Euro.”

“If inflation were to not fall or ease much less than the central banks expect the ECB would always be chasing inflation developments, would stand little chance of anchoring it and would produce negative real interest rates medium-term as a result. The Fed on the other hand would hike its key rate more significantly than it is planning so far. In the end, US Dollar real interest rates would also be positive in that scenario.”

“What is decisive from the FX market’s point of view depends on the rule the central bank applies to set its rates. The Fed’s rule seems to be more suited for protection against negative inflation surprises. That too makes the Dollar attractive, not just the current rate advantage.”