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Powell Channeling His Inner Volcker Risks Pushing Dollar Higher

·2 min read

(Bloomberg) -- The dollar could rally a lot further if Federal Reserve Chair Jerome Powell really is determined to channel a much-admired inflation-busting predecessor, Paul Volcker.

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While the Bloomberg Dollar Spot Index climbed to a record Tuesday, Intercontinental Exchange Inc.’s gauge of the greenback was around a third lower than its 1985 all-time high, at the latter stages of Volcker’s tenure. The Fed’s own index of the US currency’s real-effective exchange rate was about 11% off its March peak that year.

While there are obvious differences to the macro environment now and 40 years ago, the variety of dollar gauges well below their 1980s highs hints that traders are yet to be fully convinced Powell will be as steadfastly hawkish as his illustrious predecessor in the face of a looming recession. Bloomberg’s index, broader than peers and containing key emerging-market currencies, would likely be also below its peak had it been around back then -- it started at the end of 2004.

Powell will have the opportunity to reiterate his inflation-fighting bonafides when announcing the Fed’s next policy decision and projections for rates later this month. At his Jackson Hole speech last month, he cited remarks from the former Fed Chair, who was known for his aggressive policy tightening during an eight-year term at the top of the central bank that ended in August 1987.

“Powell has taken several steps toward the famous resolve of Volcker, more openly admitting that economic pain is likely near term as a price to pay to get inflation back toward target,” said Sean Callow, senior currency strategist at Westpac Banking Corp. “Most central bankers like to be compared to Volcker and the closer Powell moves toward Volcker, the more sustained the US dollar’s yield appeal will be.”

The ICE Dollar Index surged 96% from its Volcker-era trough to peak, while the currency’s inflation-adjusted trade-weighted index climbed 45%. Admittedly a crude comparison, the gauges are up 24% and 17% respectively from their lows of Powell’s tenure.

“It comes as no surprise that the dollar hit a fresh record high on both safe-haven flows from global economic weakness and as a resilient US economy paves the way for the Fed to remain aggressive,” said Edward Moya, a senior market analyst at Oanda Corp. “King Dollar has awoken from a nap.”

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