Why the dollar fell on the rate hike – 5 reasons

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The Fed raised interest rates but the US dollar fell. What is going on? Sure, the hike was fully expected via clears messages from the Fed. Calling them “thick hints” would be an understatement. However, the magnitude of the falls is quite significant and this may be far from teh end of these falls.

Here are 5 dollar downers, followed by open questions about why the Fed decided to act now and not later.

  1. No change to rate projections: The famous dot-plot remained unchanged in the median: 3 hikes in 2017 to 1.4% and an interest rate of 2.1% in 2018. Bringing the hike forward does not bring new hikes forward.
  2. No reassessment of economic outlook: This is something that Fed Chair Janet Yellen clarified. She does not see accelerated growth, inflation or job gains. This “unchanged” message is quite disappointing for those that expected a more confident message. The Fed prepared markets during a full year for the first rate hike, waited another year for the second one and suddenly raises the rates again within three months without a changing the outlook? That’s a downer.
  3. Getting closer to neutral rate: The word “neutral” continues featuring in Yellen’s appearances. Basically, raising rates now means less hikes to go. The bar is not raised. Yellen seemed to signal the end of the hike cycle after only three hikes. Sure, there more hikes ahead of us than behind us, but she is already cooling things down.
  4. Dovish Dissenter: Bringing the interest rate forward to March was too much for the President of the Minnesota Fed Neil Kashkari. This FOMC voter focused on bank regulation and now exposed his dovish side. Dovishness is not good for the dollar.
  5. Buy the rumor, sell the fact: This is the classic and also immediate explanation, yet it seems that the reaction is quite strong and that it is not over yet. Further reactions could be seen at the wake of the Tokyo session as well as the wake of the European session.

The dollar looks weak also in the morning after – updates on 7 currencies.

So why now? Open questions:

So why did the Fed raise rates now? This is also a question that reporters asked Yellen, but she did not provide a very clear answer.

Analysis: Did the Fed “sneak in” a hike because of strong stocks?

Do they want a weaker dollar?

What do you think?

Fed March Hike – all the updates

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

6 Comments

  1. I’m getting doubts about if we will ever see EURUSD parity anywhere soon without a little bank crisis in Europe. Parity is overdue for at least a year if you look back on what analysts said just before the beginning of the ECB QE program.

    • Parity had a chance in January, but Trump did not really follow through on his bombastic campaign promises regarding tax cuts and infrastructure spending. The only scenario for parity is that we wee Marine Le Pen as the President of France, which at the moment seems unlikely.

    • And what is significant about parity?

      Just numbers being equal for a transient time driven by a ridiculous herding mentality of the testosterone laden clots gambling in the markets.

      • Nothing. It’s just that I start to consider trading against the banks!

        • Betting against the CB’s, eh? Good luck.

          BTW Europe already has a permanent banking crisis. I am not sure where any more crisis can develop……