Gold Silver Reports (GSR) – “The dollar has been weakening since mid-August and the rate hikes for this week and December are pretty fully priced in. Even for 2019 expectations are partly baked in,” said Eric Theoret, FX strategist at Scotiabank.
Investors are wondering whether a highly anticipated rate increase by the Federal Reserve this week will reignite a dollar rally. Some analysts are skeptical that fully anticipated monetary tightening will do the trick.
The dollar, measured by the popular ICE U.S. Dollar Index DXY, +0.10% is up 2.3% in the year to date, but has dropped 1% over the past month, according to FactSet.
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The buck’s drivers are less clear than they were in the second quarter of the year, when global interest rate differentials boosted the greenback and outweighed worries over trade, the U.S. twin budget and current-account deficits and political turmoil.
“Euro-dollar EURUSD, -0.1021% is behaving as if investors do not believe that the U.S. rate advantage will lead to persistent dollar strength,” wrote Steve Englander, head of global G-10 FX research at Standard Chartered.
But only days away from the third rate rise of the year, expected Wednesday, the positive sentiment surrounding the Fed has waned. And while the dollar is still stronger versus emerging-market currencies which are sensitive to the Fed’s balance sheet unwinding, its advance against its developed market rivals has shrunk.
The European Central Bank indeed seemed to be recovering its confidence, said Theoret, referencing comments from ECB head Mario Draghi earlier Monday in which he said he expected underlying eurozone inflation to rise.
Wells Fargo global fixed income strategist Peter Wilson said that the monetary policy divergence had pretty much run its course now. The near-term outlook for the greenback remained uncertain with risk stemming from both trade and politics.
“Our tentative interpretation is that the market is resistant to the idea that rate moves at this point are conveying much information about the underlying strength of the U.S. economy. This might change if there were visible improvements in productive and trend growth, but for now, skepticism reigns,” Englander said.
So now, “people are waiting and speculating whether the Fed will make changes. As you move closer to the neutral rate signaling becomes less useful,” Theoret said. “So will they keep the dots and change their messaging? Will they do away with them? If they did, it might create some anxiety in the market.”
“We continue to expect that the dollar weakness seen in late 2017 and early 2018 will resume—and will be more apparent in 2019. However, we acknowledge that near-term risks remain finely balanced, and also that the starting point for any euro appreciation is now lower than we had anticipated,” Wilson said.
