U.S. dollar likely to benefit amid synchronised monetary policy easing, says ANZ Research

The United States dollar is expected to benefit amid synchronised monetary policy easing environment, wherein the immediate FX implications are broadly neutral, according to the latest research report from ANZ Research. However, that neutrality is not expected to hold for long.

In response to heightened global economic uncertainty and ongoing weakness in manufacturing, central banks have indicated their willingness to ease monetary policy if conditions do not improve shortly.

Official liquidity will also benefit as part of any monetary stimulus effort. It would be contradictory for the Fed to cut interest rates but not end balance sheet normalisation. Given negative ECB rates, quantitative easing will be an important ingredient in any additional monetary stimulus.

However, given ANZ’s expectation that volatility will pick up, overall liquidity is not expected to improve sufficiently to benefit cyclical currencies.

"In our assessment, how monetary easing will affect FX markets is contingent on the response in both relative growth and inflation expectations. We believe those anticipated developments will benefit the dollar," the report added in its comments.

Meanwhile, the Fed has a better track record of meeting its inflation and employment objectives than other central banks in recent years. The US economy is operating at or close to full capacity, core inflation is close to target and the banking system is healthy.