5th May 2015 by LauraParsons
Since the turn of the year, the US Dollar (USD) has generally softened after having enjoyed a sustained bullish run in the fourth-quarter of 2014. This is mostly the result of futures traders and rate hawks continually paring bets as to the timing of a Federal Reserve benchmark rate hike.
Having expected the Fed to lift off with rate revisions in early 2015, the feeling is mounting that they could continue to delay an increase until 2016. This is mainly due to a succession of disappointing domestic data results. In addition, the high value of the US Dollar was highlighted by the International Monetary Fund (IMF) as a potential hurdle for the US economic recovery.
‘The drama offered by policy divergence has already run its course,’ analysts stated. ‘Valuations show the Dollar is nearly the world’s most overvalued currency.’
In response to increased pressure to advance the lending rate, Federal Reserve Chair Janet Yellen stated that results from data would dictate the timing. She particularly referenced improvement in the labour market as a pre-requisite. After a US Non-Farm Payrolls data publication produced less-than-ideal results, the general fear was that the Fed would latch on to this as a reason to delay hikes.
‘The training wheels are coming off, to some extent, on monetary policy,’ said Scott Anderson, chief economist at Bank of the West in San Francisco. ‘Economic data, it’s going to get a lot closer scrutiny.’
Recent developments have seen little by way of improvement to US data results. The Fed has responded to this by stating that the timing of a hike was not as important as the rate at which it is increased.
‘This should be the slowest tightening cycle since the funds rate became the policy instrument of choice’ in 1982, said former Fed official Roberto Perli.
‘I would lean to a little later [for rate increases] versus a little earlier,’ Atlanta Fed President Dennis Lockhart, who votes on policy this year and is seen as being close to the consensus on the FOMC, told reporters after giving a speech in West Palm Beach, Florida, last week.
With all that in mind, there is a high likelihood that the US Dollar will decline against peers like the Pound over the coming months. Given that the strength of the ‘Buck’ (USD) could be a hindrance to economic growth and data has printed poorly since the turn of the year, a delay to the rate hike seems almost inevitable.
The Federal Reserve will no doubt be supporting the devaluation of the currency, but declines may be limited as ongoing geopolitical tensions in Greece continue to increase demand for safe-haven assets. Officials will be hoping that risk-appetite resumes in order to safely devalue the Dollar.
In addition to domestic data publications, speeches from Fed officials will also be closely scrutinised by traders. Any hint as to the timing of a rate hike will be well received and lend the US Dollar support.