Inflation due to shortages in the US labor market to turn into USD-negative factor – Commerzbank

Why is the Dollar easing? There are sufficient convincing arguments supporting USD strength, but their effect is reasonably weak if the Dollar is already “expensive” anyway, economists at Commerzbank report.

Fed will have to stifle the economy if inflation is due to shortages on the US labor market

“A strong labor market report should have a USD-positive effect in an environment where the Fed reacts very sensitively to inflation pressure as higher inflation levels would then correspond to a disproportionate rate hike. However, this consideration only applies if one assumes that inflation momentum will eventually be brought under control by rising interest rates.”

“If inflation pressure is due to actual shortages in the US labor market, the Fed will have to stifle the economy considerably if it wants to avoid remaining behind inflation developments forever. In this scenario USD real interest rates will remain negative for a long time, inflation and news that point towards even higher inflation levels are no longer USD-positive at that stage but turn into USD-negative factors.”