What will it take to reverse the dollar’s six-and-a-half year downtrend? asks Simon Derrick, strategist at Bank of New York Mellon.

He believes that in the absence of a dramatic recovery in the US economy, which would allow the Federal Reserve to raise interest rates aggressively, the best chance may come from a sudden abatement of global inflationary pressures.

“Such a shift would presumably see investors turn from seeking out currencies with the most hawkish central banks to favouring those with the most growth-oriented policy stance,” he says. “In this situation, the dollar should be a natural winner.”

However, with Nymex crude oil up more than 100 per cent year-on-year, and the CRB commodities index up nearly 50 per cent over the same period, there appears to be little to cheer about, Mr Derrick says.

But he says there are some interesting signs for those looking for an easing of price pressures.

He points to marked reversals in a number of basic foodstuffs, including rice and wheat, and a sharp drop in the Baltic Dry index, a measure of commodity shipping costs. Mr Derrick also notes that gold, normally a reliable indicator of inflation concerns, remains well below its mid-March levels.

“All of this remains just tentative evidence that inflationary pressures may start to abate from here. However, with oil stumbling in the past 24 hours, perhaps now is the time to start looking for more evidence.”

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