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Dollar Hits 2-Year Low as Fed Signals Low Rates to Stay

·2 min read

By Yasin Ebrahim

Investing.com – The dollar fell to a more than two-year low Monday, as hopes the lower-for-longer interest rates will continue for a prolonged period were given a boost after Federal Reserve Vice Chairman Richard Clarida stressed the importance of the central bank's recent policy shift allowing inflation to run above target.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, fell 0.28% to 92.12, to trade near its lowest level since May 2018.

"If policy seeks only to return inflation to 2% following a downturn," Reuters reported Clarida as saying, the previous approach "will tend to generate inflation that averages less than 2%."

To offset that risk, the Federal Reserve has made changes to its policy framework, with Chairman Jerome Powell in a speech last week laying out a plan to allow inflation to run above the 2% target to boost job growth and the overall economy.

Clarida also suggested that the central bank could revisit the idea of yield curve control – a measure to curb against rates running up too quickly, which would hurt lending activity.

The push to prioritize inflation could keep the dollar in the dark, experts have warned.

The domestic purchasing power of the dollar could to be eroded more quickly by higher inflation and "it will be difficult to assume that the greenback will maintain its purchasing power on the FX market in the long run (not depreciate)," Commerzbank (DE:CBKG) said.

The weakness in the greenback came as data showed speculators raised their bearish bets on the dollar.

The value of the net short dollar position increased to $33.68 billion in the week ended Aug. 25, compared with a net short of $31.56 billion the previous week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.

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