Former Federal Reserve Chair Alan Greenspan sees a monetary tailwind for the dollar in the coming year even in the event that US monetary policymakers slow or halt their current interest-rate hiking campaign.
Even if, as some prognosticators expect, US inflation crests in the first half of 2023 and the Federal Reserve can slow or even stop the pace of rate increases, the US dollar will still have a monetary tailwind to support it, Greenspan, now a senior economic adviser to Advisors Capital Management, wrote in a commentary dated Wednesday.
Gains in the dollar have been propelled by the steeper tightening trajectory of the Fed relative to many peers, Greenspan noted. The Bloomberg Dollar Spot Index has surged more than 13% this year, with currencies including the yen, pound and euro hitting multidecade lows against the greenback.
The Fed is expected to raise interest rates by 75 basis points for a fourth consecutive time Wednesday to a range of 3.75 to 4% in an effort to curb the hottest inflation in 40 years. The European Central Banks deposit rate by contrast is currently 1.5%.
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The elephant in the room with respect to continued strength in the US dollar going forward may turn out to be the $95 billion per month reduction in the Federal Reserves balance sheet, Greenspan also said.
Fed policymakers are allowing up to $95 billion a month of the central banks bond holdings to mature without reinvestment a move known as quantitative tightening.
The fact that the supply of US dollars can be expected to steadily decrease makes it a better store of value, Greenspan wrote.
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