Inflation will drive the dollar higher – but only if yields follow through
In the latest edition of UBS Macro Strategy Weekly ‘Key Issue’, we elaborated on the non-consensus view that inflation will surprise to the upside this year (e-2014 core PCE forecast 1.9%), triggering a corresponding reaction in asset markets. While the dollar is expected to benefit from an inflation jump, we note that a higher price level alone is not sufficient. For a meaningful move, US yields would need to rise, and to the extent that US real yields also maintain ascendancy. Momentum in the latter has proven elusive, even more so if US inflation generates policy volatility and hurts risk appetite.
Read the full report: UBS