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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
Do they want a weaker dollar?
What do you think?Get the 5 most predictable currency pairs