US Dollar: Is Fed caution curbing gains? – MUFG

The US Dollar has softened modestly following a more cautious signal from the FOMC on further rate hikes, notes MUFG’s Lee Hardman, after the committee kept rates unchanged. Although two members dissented in favour of a hike, the broader tone and acknowledgement of tighter financial conditions reinforce MUFG’s expectation of just one additional Fed increase. Higher energy prices and risks in the euro area nevertheless continue to support the Dollar.

Can the Dollar retain support as the Fed turns more cautious?

"The US dollar has continued to trade at modestly weaker levels overnight after yesterday’s FOMC meeting. The US dollar has been undermined by the scaling back of Fed rate hike expectations with the 2-year US Treasury yield remaining around 9bps lower than prior to yesterday’s FOMC policy update. The Fed decided to leave rates on hold as expected overnight although there were two hawkish dissenters: Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack who both favoured raising rates by 0.25 point."

"However, the overall tone of the updated policy statement and comments from Fed Chair Kevin Warsh in the press conference suggested more caution over delivering further rate hikes. The statement noted that “the accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation” to their inflation target. At the same time, it described economic activity as expanding at a “strong pace” supported by “strong” productivity growth and “robust” capital investment."

"Overall, the comments push back against expectations for more aggressive Fed rate hikes by acknowledging the recent tightening in financial conditions and stronger productivity growth. It supports our forecast that the Fed may deliver only one further hike. While the scaling back of Fed rate hike expectations will put a dampener on the US dollar’s upward momentum, it is still deriving support from negative developments overseas including higher energy prices and heightened fiscal and political risks in the euro area."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)