Average Inflation Targeting (AIT) could be a net negative for the dollar as other global central banks appear unable or unwilling to follow the Fed.
The G20 FX Covenant
Ever since the G20 in 2013 committed to ‘not target our exchange rates for competitive purposes’, global central banks have by and large refrained from open foreign exchange intervention. The G20 FX covenant has been maintained under the Trump presidency, which has preferred to put pressure on individual countries rather than engage in outright FX intervention.
Yet exchange rates are never far from central bankers’ minds. Whenever they get asked how the exchange rate factors into their policy decision, their stock-in-trade answer is that while, per the G20 covenant, they do not target exchange rates, those are important drivers of inflation and of the output gap.
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