August 28, 2020

Dollar slides as bond market signals rising inflation angst

The dollar retreated and a key portion of the US government bond market flashed inflation warning signs amid concern that the Federal Reserve’s new policy framework could erode the appeal of US assets.

Fed chair Jay Powell on Thursday revealed enhanced flexibility to allow the inflation rate to push past the central bank’s 2 per cent target.

The tweak is designed to allow more leeway to support the economy in the wake of the coronavirus shock. But for markets, it probably means lower benchmark interest rates for longer and a potential pick-up in long dormant inflation.

Jan Hatzius, chief US economist at Goldman Sachs, described the Fed’s new framework as “a significant dovish long-term shift”.

The dollar index, a measure of the currency against six developed market peers, fell 0.8 per cent on Friday as investors weighed up the move. Sterling rallied to $1.33, its highest level of 2020, while the euro advanced to $1.1914. MSCI’s measure of emerging market currencies rallied to its highest level since early March in a sign of the buck’s broad decline.

US stocks were modestly higher, with the S&P 500 up 0.2 per cent and headed for its seventh day of gains and the

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