Rabobank: Real interest rates are expected to rise and there is an opportunity for the dollar to strengthen

Rabobank (Rabobank) said in a new research report that the market debate about reflation is unlikely to subside, meaning the dollar could strengthen in the coming months.

Dollar index image: anue vantage point

With regard to inflationary pressures in the real economy, Federal Reserve Board (Fed) officials recently continued to repeat the emphasis on inflation as a “temporary phenomenon” to try to suppress market concerns about inflation, in order to suppress the response of the U.S. bond yield to rising inflation.

Rabobank believes that, regardless of whether the Federal Reserve’s assessment of this year’s spike in inflation is correct, but the moderate expansion of the U.S. real economy, which is likely to provide some support for the dollar in the coming months.

The key logic for a long dollar lies in the moderate rise in real interest rates, which should be widely welcomed as a stronger real interest rate is usually a signal that the market expects a good economic recovery, meaning that expectations of demand growth will outweigh expectations of rising inflation.

Rabobank said that no matter which side of the U.S. inflation debate will be proven right, a renewed rise in real interest rates in anticipation of economic expansion would indicate that there is still room for volatility in the trading environment in the coming weeks, with potential opportunities for dollar strength.