Central banks’ noise helps dollar – and Joe Biden

Top dollar. Central bankers’ hot air is propelling the dollar higher – and indirectly helping U.S. President Joe Biden. Mixed messages by the likes of European Central Bank President Christine Lagarde and Federal Reserve Chair Jerome Powell have helped the currency reverse losses suffered earlier this year. As long as the Fed keeps markets guessing on when to cut interest rates, the greenback will benefit.

At the start of 2024, King Dollar looked set to lose its throne. Back then, markets were expecting as many as six rate cuts by the Fed. That pushed the Dollar Index, which measures the greenback against a basket of six major currencies, more than 2% lower between mid-February and early March.

Since March 8, though, the dollar has regained most of the lost ground. On Wednesday, it hit the highest level against the Japanese yen since 1990, even though the Bank of Japan recently raised interest rates. In December, one euro bought more than 1.11 dollars. Today, that ratio is 1.08.

Central bankers have helped. As inflation is converging to their 2% targets, Lagarde, Powell and Bank of England Governor Andrew Bailey have kept markets guessing on when they will ease monetary policy. Their stated desire to be “data-dependent” – reserving the right to flip-flop if the numbers change – has left traders none the wiser.

The U.S. economy is strengthening, too. The country’s GDP grew at an annual rate of 3.4% in the last quarter of 2024, much faster than the 0.1% expansion in euro zone’s activity and 0.2% contraction suffered by the UK in the same period. As a result, markets are now pricing just three rate cuts by the Fed this year – in line with the central bank’s guidance – according to derivatives data collected by LSEG.

Powell and others could yet change course, but there’s a happy consequence for the White House if the dollar naturally stays high. A stronger currency lowers the price of imports and that helps keep inflation in check. Fast growth and falling inflation could be great assets for Biden as he braces for a tough election battle with Donald Trump in November. So far, not many voters are willing to credit the incumbent for these achievements. But with the economy and inflation consistently ranking as a top issue for Americans, every little improvement helps.