Impact on the dollar?

Posted by Scriptaty | 8:46 PM

“What the Fed did on Sept. 21 was fully expected,” said Andy Busch, global foreign exchange strategist at Harris/Nesbitt.

Looking ahead, Busch says, future Fed actions will be key to dollar strength. “There has been a lot of discussion about whether the Fed will pause here or continue to tighten. My guess is they will continue to tighten by .25 basis points until we get to neutral.”

Generally, the Fed has said it perceives “neutral” to be 1 percent above the current rate of inflation. Depending on where one sees inflation in the U.S, a Fed Funds level would generally be considered neutral at 3 percent, well above the current 1.75-percent level.

Analysts are mixed on whether the Fed will tighten again in November and December. But, if a sustained tightening policy is maintained over the next several months, Busch says “that would be very positive for the dollar” and could allow for a test of the $1.19 area into the fourth quarter.

However, the U.S. Treasury market is anticipating tightening even beyond this year.

“The yield curve is steep in the U.S. right now, because the market is pricing in that rates will be 2 to 2.50 basis points higher in one to two years,” says Brian Dolan, director of research at Gain Capital.

Analysts will be watching a couple of different factors in the months ahead, in relation to any Fed tightening scenario, including how fast the hikes are coming, how much inflation is behind the rate hikes and the size of the hikes.

“Maybe the dollar will be able to catch a bid on higher interest rates in the U.S.,” says Tom Rogers, New York currency analyst at Thomson Financial. But, he notes it will be bad for the dollar if the Fed is raising rates because of inflation concerns. “If they are raising because of economic strength and not because of inflation, that will be a positive for the dollar,” Rogers says.

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