LONDON: Analysis of recent US economic data might lead foreign exchange traders to conclude that further broad-based dollar weakness is likely.

The trade-weighted value of the greenback, the dollar index has fallen sharply since Thursday’s announcement of further measures to ease monetary policy by the US central bank, but the decline should continue.

There is an old market adage, “never bet against the Fed,” and with economists, in a Reuters poll, estimating the US Federal Reserve’s latest measures could mean purchases of some $ 600 billion of bonds, that may again be the case.

The measures, weighing on US yields, should make it less attractive to hold US paper and prompt investors to switch into assets denominated in other currencies.

On a weekly chart, the dollar index, trading on Monday at 78.90, has been flirting with the top of its ichimoku cloud (currently 78.835) below which a test of its 100-week moving average (presently 78.360) would be the next logical target ahead of the cloud base at 77.24.

And the fact that the Fed’s actions have not been met with universal acclamation could be another drag on the dollar.

“Further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, it’s also likely to cause an unwanted increase in inflation,” Richmond Fed President Jeffrey Lacker said recently.

While Lacker, a prominent inflation hawk, was the only vote against the Fed’s new measures, his views may resonate.

Ultra-accommodative monetary policy, when there is a possibility of higher inflation, is not usually a recipe for a strong currency.

Friday’s US consumer price index (CPI) rose 0.6 percent in August, its first increase in five months and its biggest gain since June 2009.

While rising gasoline prices accounted for 80 percent of the CPI jump, this upward price pressure occurred even before the new easing measures had been announced.

“(The) Fed’s QE3 will stoke the stock market and commodity prices,” ratings agency Egan-Jones said on Friday, echoing some of Lacker’s concerns.

“The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power,” it added.

In consequence, it downgraded the US country rating to AA-minus from AA, a move that may add to negative sentiment toward the greenback and hence weigh on the dollar index.

Admittedly Egan Jones’s evaluation of the US credit rating is an outlier but while Moody’s Investors Service, Fitch and Standard & Poor’s rate the US as Aaa, AAA and AA-plus respectively, all have a negative outlook attached.

There was also no cheer in Friday’s US industrial output data which fell 1.2 percent in August, the steepest decline since March 2009.

Even allowing for the one-off effect of Hurricane Isaac that accounted for 0.3 percentage points to the fall, the drop in output was unwelcome, possibly indicating manufacturers are finding it harder to shift stock.

The industrial output decline was driven by a 0.7 percent drop in factory output yet business inventories in July had risen 0.8 percent, the most in six months.

If the inventory building has not been offset by onward sales to end-users, that may explain August’s fall in industrial output and highlights the fragility of the US economy.

Hurricane Isaac may have passed, but the dollar index, trading quietly on Monday after recent falls, could just be at the eye of the storm and have to face more heavy downpours.

— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.