The role of monetary policy in determining currency movement is probably overplayed. Nonetheless, if perceptions of policy, and particularly Fed policy, are key, it seems most likely that the US dollar will fall – whatever happens.

Monetary policy has been a hotbed of currency market discussion in recent years, not least because the unexpected surge in inflation has made policy much more volatile than before. But while the hyperfocus on policy, especially from the Federal Reserve, draws many column inches in the financial press and chatter on social media, there’s little evidence that it has created as much volatility in currencies as we might have expected.

In essence, all that has really happened is that the Bank of Japan’s refusal to join the rate-hike party, up until very recently, has crushed the yen as it has become the only viable funding currency for the carry trade. Other currency pairings, notably euro/dollar, have been as exciting as watching paint dry despite all the interest rate volatility. Nonetheless, there’s still a microscopic focus on Fed policy and how it might impact the dollar going forward. The Standard Bank still believes that the effects of policy will be very modest but we also believe that they are one-sided with the US dollar most likely to slip whatever the Fed does.

This might seem a strange thing to say, but bear with us. In the Standard Bank’s view, and probably the view of everybody else, there are two main scenarios for the path of the US economy and Fed policy.

The first path is that the economy weakens further, inflation comes down towards the 2% target – and the Fed starts to cut rates. We can debate the starting point for rate cuts, the speed of the reduction and the final destination, but these things probably don’t matter too much when it comes to the US dollar. For it seems likely that this scenario will produce a lower US dollar. Just this week, we’ve seen US CPI data that has given the market some hope of policy easing this year – and the dollar has fallen. It has not fallen very much but this fits the argument we made at the start, that monetary policy changes are not actually worth much when it comes to FX volatility.

Nonetheless, there’s probably little disagreement that rate cuts from the Fed, particularly if they start in the next few months, will weigh on the US dollar. But if this scenario of weaker growth and falling inflation opens the way to a weaker US dollar, surely the second, and opposite scenario, of robust US growth and stubborn, or even higher, inflation will lift the US dollar.

In other words, the risks to the dollar as they relate to monetary policy are not one-side (to the downside) but two-sided as the US dollar could rally in this second scenario. But the Standard Bank does not take this view because it believes that the risks to Fed policy are asymmetric, not symmetric. That is, the Fed will lower rates if inflation falls but won’t hike if inflation proves stubborn. This might seem like a contentious view, but, up to now at least, this is exactly the path that the Fed has taken.

At no point have leading Fed officials like Chair Powell suggested that rates will rise if inflation proves stubborn. Instead, the prescription in this event would seem to be to hold the current policy rate at its current level for longer. Now we dare say that some would argue that this stability alone is sufficient to generate a stronger US dollar, although we’d contend that it has not done so thus far. The real danger to the US dollar comes if the markets push the Fed to hike, but the Bank is obdurate in its resistance. This throws the whole anti-inflation credibility of the Fed into question; a very uncomfortable place for any central bank to be in an election year.

Now, of course, the Fed might ultimately have to buckle and hike rates if inflation really proves so obstinate, and this could indeed lift the US dollar substantially. But, the Fed seems determined to just hold the rate peak for longer, and not threaten rate hikes, in the event of persistent inflation; something that seems unusual in our view and something that creates the asymmetric risk of a lower US dollar.