COMMENT-Expectations weigh dollar while reality supports it

Expectations that the U.S. interest rate will fall are weighing on the dollar but the fact that the rate will remain relatively high for a long time will support the currency.

The U.S. interest rate might never drop to zero percent again, and while there is inflation to trouble the U.S. central bank, the level of interest rates in the United States should stay north of the 2 percent inflation target.

The interest rate might fall but it will probably be in positive territory, and that will certainly be the case while there is inflation, which is the one problem than cannot be solved by spending, which has been the response to most problems in the last 15 years.

While lower inflation might allow for U.S interest rates to fall, an interest rate between 2-3% is probably the downside limit, and the floor may be higher as once it begins to fall it will create inflation.

The floor may well be higher as a drop to 3.25% for the yield on benchmark U.S. debt would meet the target to correct the entire rise for the 10-year yield between 2020 and 2023. At that point bonds would likely be overbought at limit of 20-month Bollinger Bands, and 3.25% is where the big bond sell-off began in September 2022.

This chimes with interest rate futures which imply a floor between 3.0-3.25% at the end of 2025. At the end of next year the eurozone interest rate is seen around 2%, Japan 0.5%, Switzerland 0.6% and UK and Australia 3.5% and New Zealand 3.0%. Differences in interest rates influencing the dollar versus major currencies will be similar to those influencing it today.

Big moves like the recent USD/JPY plunge and simultaneous EUR/USD rise toward the peak of this year's range are probably opportunities to invest in a dollar with less risk that interest rates returns are lessened by adverse FX movement.

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