Fed Keeps on Disappointing Dollar Bulls

Market Trends - 22/09/2016

For US dollar bulls, 2016 has been an endless series of disappointments. When the year began, the consensus of analysts was for the greenback to strengthen to USDJPY 125.00 and EURUSD 1.0500 by year end. Instead, the currency has weakened a big 17.00% to USDJPY 100.20 and 3.00% to EURUSD 1.1202, forcing most strategists to slash their forecasts for the rest of the year. Those banking on the Federal Reserve to revive dollar demand, got at least one wish fulfilled when the Central Bank, at its just concluded monetary policy meeting, signalled for one rate hike before the end of the year. But along with the promise came the caveat that bulls looking for aggressive rate action in 2017 and beyond should revise their expectations lower. What irked investors even more was the tone and tenor of the official FOMC statement, which suggested the Fed was still expecting a lot of risks to drive it off course.

 

The result of the statement and less hawkish forecasts was an immediate selloff in the US dollar versus major peers.  Additionally, the Fed’s so called “dot plot,” which it employs to signal its policy stance, shows members expecting a single quarter-point rate hike this year, with just two rate increases forecast for 2017. This is in stark contrast to statements in January, when policymakers were advocating four hikes in 2016 followed by another four next year. It is no wonder that dollar bulls are disappointed and the currency is down 4.00% year-to-date. The announcement further dulls the outlook for the USD after a substantial 20.00% rally since the middle of 2014; more so at a time when central banks in Europe and Japan are busy debasing their respective currencies with accommodative programs. The dollar’s reaction to the latest Fed meet might seem counter intuitive to some, but the fact remains that there’s just no incentive for investors to take aggressive bets on the dollar near-term.

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