A key question for the Federal Reserve in the months ahead will be the U.S. dollar’s future direction. That question will have a crucial bearing on the appropriate timing of the start of the Fed’s interest rate hiking cycle. If it is thought that the dollar’s recent strengthening is likely to be reversed, the Fed would be advised to start raising interest rates soon for fear of allowing domestic inflationary pressures to build up. By contrast, if it is thought that the dollar might very well add to its recent gains, the Fed would be advised to exercise patience before hiking rates for fear of setting back the economic recovery.
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