Rising inflation is usually positive for a currency as it forces a central bank to raise interest rates which in turn creates a higher yield but it seems in the case of the greenback, higher inflation may come back to haunt it.
Inflation in America now stands within the US Federal Reserve’s target range of between 2 and 3 percent which seems to give the green light for around 4 rate rises this year (provided inflation remains around or higher than the current range)
We all know what happened when the US Federal Reserve pushed rates too high just before the 2008 financial crisis, the economy collapsed and took the US consumers money with it
At that time the main reason the Fed was so aggressive in hiking interest rates was the soaring inflation figures and this time around it looks as if history is repeating itself.
This poses a serious problem for the Fed as history shows that it’s a bad idea to lift rates on inflation figures alone as this can present other issues which pose bigger threats in the long term.
Higher rates will inevitably hit the American consumer and it's only a matter of time before they reign in their spending habits
"The markets are probably going to talk about stagflation, where you are getting stronger inflation but not really getting a stronger consumer," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
If the American consumer continues to cut back on spending while the Fed is raising rates, the later may have to rethink the situation and any sudden pause in rate hikes is going to hit the US dollar hard.
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