Weakening of the US dollar may further strengthen the Azerbaijani manat, Head of FX Strategy at Saxo Bank John Hardy told Trend on June 12.
He was commenting on the possibility of the US Federal Reserve’s increasing interest rates.
"Quite certain that the Fed will hike rates as the US economy has performed well this quarter and inflation has risen up to the 2 percent target level," he said. "The vast majority of market participants is also looking for a hike, so it would be a major surprise if the Fed were to not hike this week."
Touching upon the influence of the Fed’s decision on the dollar's exchange rate against global currencies and the currencies of developing countries, Hardy noted that this will depend very much on any guidance shift from the Fed on its attitude toward future hikes.
"There has been considerable speculation about what the Fed’s focus on a "symmetrical" response to inflation now that it has risen to the target area means and the general impression is that the Fed will be happy to allow inflation to run a bit above the target for quite some time without shifting current expectations higher," he said. "This could weaken the USD a bit if the Fed signals a slower response to higher inflation from here. A weaker US dollar could see the manat stronger still, though it appears that the Azerbaijan policy makers want to maintain a stable exchange rate for now to maintain confidence in the manat, which is fairly easy to do as long as oil prices don’t slip more than a few dollars lower."
At the same time, Hardy believes that the Fed’s decision is unlikely to greatly affect oil prices.
"The Fed’s decision won’t likely have much impact on the oil price in our view, but could encourage or discourage risk taking, depending on how "dovish" the Fed sounds," he said. "But future demand growth for oil globally has likely been quite significantly impacted by the latest run-up in prices over the last few months, particularly as the USD has strengthened as well – meaning the price rise has been even more significant in countries with weak currencies. In particular, emerging market demand growth is likely to prove slower at these prices levels or higher in local currency terms."
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