The Federal Reserve has been raising its policy rate and has expressed a belief that the U.S. economy will evolve in a way that will enable the Federal Reserve to keep raising the fed funds rate, albeit in a gradual manner.
The European Central Bank (ECB) has not raised its policy rates and some think it might not before the middle of 2019. The Bank of Japan (BOJ) hasn't raised its policy rate either and no one has any good sense when it will again.
The rub here is that the Federal Reserve might be a foe to the stock market as it raises the fed funds rate and a friend to other central banks as it raises the fed funds rate.
Time for Takeoff?
The dual perspective regarding the Federal Reserve's policy stance is grounded in the notion that higher rates in the U.S., and depressed rates elsewhere, will drive capital flight that strengthens the dollar and weakens the euro and yen. That's because the ECB and BOJ are paving the runway for capital flight by sticking to their super-low (and negative) policy rates while the Federal Reserve is raising its policy rate.
This currency trade seems to have availed itself again in recent weeks, as the dollar, which had been in a swoon, has regained some of its swagger on the back of softening economic data abroad and the Federal Reserve's rate-hike inclination at home.
Presumably, the ECB and the BOJ are happy to see the greenback gaining some strength at the expense of the euro and yen since a stronger euro and yen have been posing some policy headwinds by tamping down inflation.
What It All Means
If the policy paths between the Federal Reserve and the ECB and BOJ continue to diverge in the way many expect them to, perhaps the inflation trends in the eurozone and Japan will get back on a path the ECB and the Bank of Japan want them to, courtesy of do-nothing policies that weaken their currencies as investors seek higher interest-rate returns in the U.S.