The news this week was the weakening of the dollar, as the U.S. Dollar Index hit its lowest level since summer of last year. Although the dollar has been losing ground since the beginning of this year, the trend accelerated over the past week.

There were both political and economic reasons for this:

  • Politically, the inability of the Trump Administration to pass health care reform in the Senate is causing the market to shift from a “Trump reflation” sentiment to disappointment about the possibility of fiscal stimulus. This could drive a downturn in consumer sentiment, which may stall U.S. economic growth.
  • Globally, more hawkish comments recently coming from central banks have strengthened international currencies over the dollar. This includes the European Central Bank, the Bank of England and the Reserve Bank of Australia. As for the Bank of Canada, they not only spoke optimistically but went ahead and raised rates last week in a quick turnaround from their negative comments earlier this year.

Why have the world's central bankers, including U.S. Federal Reserve Chair Janet Yellen, turned more hawkish?

The straightforward answer is that the global economy is in recovery. This is best described by City National Rochdale Managing Director Charles Boettcher in his Market Perspectives video, where he tells us that, while the U.S. stock market has performed well this year, international stocks have done better and emerging market stocks have more than doubled the U.S. stock market's performance.

What does this mean? The rest of the world is no longer leaning on the economic recovery in the U.S., allowing them to raise rates independently. Meanwhile, the future strength of our stock market - along with future corporate earnings - will be critically dependent on much-anticipated corporate and individual tax cuts that are still clouded in uncertainty right now.

That being said, with inflation staying low – none of the countries with bullish outlooks has hit its inflation-rate target – what justifies the flip-flopping of these central bankers?

Here are some possible explanations:

  1. Instead of measuring inflation through traditional core CPI, the central bankers may be watching asset price inflation, which is the speed of price appreciation in stocks and housing prices. Asset price inflation has indeed been robust around the world and the bankers' intention may be to take some of the air out of those growing bubbles.
  2. Central bankers in general may just want to bring monetary policies back to normal from the super-low interest rate environment we have been in since the 2008 recession. Many of these central bankers are coming close to the ends of their terms, and so there may be some legacy-building incentives at work as well.

These are just some explanations for the change in sentiment in the financial market. What is your view?

Feel free to write to us at and tell us what you think. We'd love to hear from you!

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