The dollar edged higher against the euro and yen Monday, as investors wondered whether the currency can stay firm in the face of a more dovish-than-expected Federal Reserve.
Advertisement
In the wake of the new policy statement, the USA dollar index (DXY), which tracks the greenback against a basket of other major currencies, had declined 1.9 per cent as of Friday morning.
The dollar rose 0.25 percent against the yen to 111.83 yen. It is also why we have viewed the large reflex and retracement in yields in response to the taper in 2013 as the leading move for the dollar, as the Fed advanced into the next phase of normalizing policy from an extraordinary position.
Analysts said the market was generally taking its cue from positive factors such as higher oil prices and a weaker USA dollar, which makes commodities less expensive for consumers paying with other currencies.
Federal Reserve Chair Janet Yellen and the FOMC* believe in the Phillips Curve, which postulates that low unemployment causes inflation.
“Despite the current rally in risk, we are more inclined to be broadly bearish on emerging markets given the underlying weakening trend”, said Frances Cheung, head of rates strategy, Asia ex-Japan at Societe Generale in Hong Kong. Japanese markets were closed for a holiday. The Fed has done a mini policy U-turn barely three months after its first interest rate hike in nine years, a concession to Wall Street global risk aversion spasm since January.
Last week, projections from the central bank implied just two quarter-point increases this year, sparking a sell-off in the USA currency. This is not a recommendation to buy or sell any market. Hence the $29 rally in gold, the plunge in the Volatility Index to 15, the fall in the U.S. dollar and the surge in oil/mining shares.
Central banks have been setting interest rates for so long that they have forgotten why they started doing it, and haven’t noticed that the practice has become irrelevant and dysfunctional. This will fuel inflationary pressure, leaving the USA central bank with no choice but to raise interest rates quickly. After five months of steady rise, the CPI dropped to 5.2 per cent in February from 5.7 per cent in January, making the case stronger for another repo rate cut by the Reserve Bank of India (RBI). How can the Fed leave its economic growth and inflation forecasts unchanged and then slash its (Dot Plot) four projected 2016 rate hikes?
“Whilst the dollar weakens and oil rises we are back to a reflationary environment for commodities, which to some extent overpowers the micro factors”, Standard Chartered metals analyst Nicholas Snowdon said.
Prior to the global financial crisis they borrowed about 60 per cent of the money they lent to Australians from the foreign markets. “We’re looking (for the kiwi) to trade reasonably quietly and maybe come off heading into Easter as people square up – we think we’ve seen the highs in the short term”.
Advertisement
Here’s what I am really waiting for (and it may sound alarmist): I not only question lower interest rates for an extended period of time, but I also question if some sort of quantitative easing could be coming soon, too.
