Lower-for-longer rates from the Fed point to a weaker-for-longer dollar

The greenback has been on a slide since the spring, and a wonky change in the Fed's approach to inflation may apply further downward pressure in the future. Yahoo Finance's Brian Sozzi, Alexis Christoforous, and Brian Cheung discuss.

Video Transcript

BRIAN SOZZI: The value of the dollar has gone down notably this summer, with the US Dollar Index hitting a two-year low. In large part, that weakness could be pinned on the Fed's super easy monetary policy. Yahoo Finance Fed correspondent Brian Cheung is here with more. Brian, ING economists are out saying essentially that the Fed has crushed the dollar. True or false?

BRIAN CHEUNG: True. Let's take a big step back. If we look at the US Dollar Index, actually as recently as yesterday, it was headed back down towards a 92 handle. As you mentioned, that would be a two-year low. In fact, it tested those levels back at the end of August.

But analysts, including at ING and a number of other houses on Wall Street as well, are saying, get used to $1. That's this week. And the big reason is because of the Federal Reserve. Keep in mind that lower-for-longer rates from the Fed do point to a weaker-for-longer US dollar, and that's because of the central bank's announcement at the end of August, about two weeks ago, that it would allow inflation to overshoot its 2% inflation target before raising rates.

And a translation is that the near-zero rates here in the United States will be here for a while, which means that interest rate differentials will be narrow. It used to be the case, keep in mind, that the Federal Reserve was the only central bank around the world before the COVID-19 crisis that had been raising rates up until those insurance cuts in 2019. Everyone else around the world was negative when you think about the European Central Bank and the eurozone, and also the Bank of Japan with negative rates before the COVID crisis.

When there's that interest rate differential, it means that there's a lot of inflow into US dollar-denominated accounts, in addition to deposits here. And what that does is it strengthens the dollar. All of that now reversing with people saying near-zero rates are going to be the case here in the United States at least for a while.

You have the European Central Bank watching this very closely when you have Christine Lagarde, the president of the ECB, being pressed in a press conference yesterday about the strengthening of the euro against the dollar. As a result, keep in mind, the euro to USD, you can find that on Yahoo Finance, EURUSD equals X. It's about 1.18 right now.

That would be testing a high so far this year. So Christine Lagarde saying yesterday that the ECB is carefully monitoring the situation. But you never like to hear central banks saying that they're paying attention to forex when their real mandate is domestic monetary policy. But again, a weaker US dollar likely the theme, at least for a while, around the world. Brian.

ALEXIS CHRISTOFOROUS: And Brian, I know we've got the Fed two-day meeting coming up next week, September 15 and 16. What are your expectations for that meeting?

BRIAN CHEUNG: Well, the expectations are for nothing, really, on the headline. Keep in mind that the Federal Reserve does have near-zero rates, no intention of going into negative territory. So the only thing that we'll be watching for that's really news is going to be any sort of updated forward guidance.

The Federal Reserve has already laid the foundation for offering a little bit more clues as to when they might raise rates at some point in the future after they've concluded that framework review. But keep in mind, the Federal Reserve appears to be holding pat with near-zero rates, saying we won't be raising rates anytime soon. And that could be underscored by that new release of the Summary of Economic Projections. You'll recall that we get these dot plots every other FOMC meeting that shows us where policymakers could see interest rates being in the next two to three years.

Previously, it was already telegraphed that we likely wouldn't have any interest rate hikes through 2022. But with the changes to what we've seen in the Fed framework, it's likely that all 17 members, because there were two, actually, that advocated for rate hikes before that point in time, it could be the case that all 17 would now see rates at near zero for the foreseeable future, which would be in line with that framework change. So no necessary surprises from the Federal Reserve, but it'll be very interesting to see Chairman Powell's language around forward guidance.

BRIAN SOZZI: Brian Cheung, thanks so much.