Surging inflation will save the dollar as the Fed ramps up rate hikes, wealth manager says

• Market expectations point to three rate hikes in the U.S. during 2018, but Keating believes the U.S. central bank is likely to move even faster.
• Strategists at Rabobank said in a note Friday that the recent inflation numbers could prove short-lived.

Spencer Platt | Getty Images

People shop along Broadway in Manhattan on January 26, 2018 in New York City.

After years of moribund price increases, inflation is back and it is set to alter monetary policy and currency markets much faster than everyone expects, an investment manager told CNBC Friday.

Recent data releases have spooked equity markets on fears that the Federal Reserve could move faster to tighten its monetary policy after years of stimulus. About a week ago, U.S. markets entered correction territory — after dropping more than 10 percent — following stronger than expected jobs data and wage growth. On Wednesday, the U.S. consumer price index came in at 2.1 percent — well above expectations.

"In the U.S., the Fed has to change (monetary policy) now that inflation is taking off," Giles Keating, managing director at wealth management firm Werthstein Institute, told CNBC Friday morning.

Market expectations point to three rate hikes in the U.S. during 2018, but Keating believes the U.S. central bank is likely to move even faster. However, the recent figures are not convincing everyone of a quicker tightening cycle from the Fed. Strategists at Rabobank said in a note Friday that the recent numbers could prove short-lived.

"Despite the recent uptick in inflation readings, we are not convinced of a sustained upward trend yet," they said, forecasting only two rate hikes this year. "The market may have to cut back on its expectations — and rates — if the recent jump in average hourly earnings turns out to be a one-off," they added.

Dollar's saviour 

The dollar hit a three-year low against the Japanese yen Friday morning and was 0.26 percent down against a basket of international currencies. This continued the downward trend that markets have become accustomed to. However, according to Keating, as the Fed increases rates, the dollar will strengthen and come back from recent lows.

"U.S. interest rates are going up, they're probably going to go up faster than people think," Keating said, adding that "sooner or later that's going to turn around the dollar."

"I think this dollar weakness cannot go on," he said.

"Standard macroeconomics says, look, fiscal expansion leads to tighter monetary policy and that tends to push the currency up. I mean that's the textbook. The textbook can go totally wrong but that's what it says and it just seems to be at the moment, there's so much bearishness about the dollar out there, everybody has cranked their forecasts for the dollar to weaker and weaker levels," Keating explained.

Aaron P. Bernstein | Reuters

Federal Reserve Chairman Jerome Powell arrives to take the oath of office at the Federal Reserve in Washington, U.S., February 5, 2018.

"I think it's getting to extreme levels, I think interest rates will save it," he said.

Some analysts, however, believe that there are other factors that will continue to pressure the dollar, including the recent overhaul in the tax system and plans to boost infrastructure investment.

"The USD is in a structural, medium-term downtrend. Part of the reason for this is the U.S. fiscal account deficit, which is expanding rapidly," Stephen Gallo, European head of forex strategy at Bank of Montreal, told CNBC earlier this week.

The dollar index has depreciated 3 percent since the start of 2018.