Monetary decoupling between West and East to strengthen the dollar – Natixis

This has not been an easy year despite the strong fiscal and monetary support to covid-struck economies, especially in the Western world. In the view of analysts at Natixis, it does not look like 2022 is going to be calmer than 2021, and not just because of the effects of the pandemic, but also because of the great decoupling of monetary policies between the West and the East.

More exchange-rate volatility seems guaranteed for 2022

“It seems that 2022 will be characterized by a great divergence of monetary policies between the key Western central banks and those in the East. Such monetary decoupling has important consequences – namely, the increase in the cost of financing due to the withdrawal of monetary stimuli in the West could further slow economic growth. This is particularly problematic given recent developments with the Omicron variant of covid in terms of reduced cross-border, but also domestic, mobility.” 

“A higher cost of financing in the West, and especially in the US, should entice the appetite of international investors increasing portfolio flows into the US and supporting a strong dollar compared with the yuan and yen. More generally, more exchange-rate volatility seems guaranteed for 2022 on the basis of such monetary-policy divergence.”

 

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