The USD will remain strong as long as the Fed signals its 'new paradigm' - Macquarie

Macquarie analyst Thierry Wizman said in a note Wednesday that recent comments from Federal Reserve officials suggest the Fed has been thinking about a "new paradigm".

The firm, which noted the comments come alongside strong US growth and higher inflation prints, said the Fed has been considering the new paradigm since late January, with structural US growth potentially higher than it thought.

"If so, the equilibrium real interest rate (r*) should be higher too, assuming that premise is valid," said Wizman.

"A higher terminal real interest rate in the upcoming US rate-easing cycle has implications for the path of policy interest rates and, by extension, for the path of the USD, all else equal," he added.

Macquarie believes that as long as the Fed signals its new paradigm and as long as the market "buys into" it, the US dollar will stay strong.

However, Wizman said they are "comforted a bit" by the premise that the Fed's preferred inflation metrics - the headline PCE price index (PCE PI) and the core PCE price index (core PCE PI) - "are likely to be much more benign than their CPI counterparts."

By Sam Boughedda

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