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US Dollar May Have Disparate Response to Fed Rate Hike

US Dollar May Have Disparate Response to Fed Rate Hike

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • All Eyes on Federal Reserve Monetary Policy Announcement
  • Traders See Near-80% Probability of 25bps Fed Rate Hike
  • US Dollar May Rise vs. Risk-On FX, Fall vs. Havens on FOMC

The US Dollar may yield a disparate response to the FOMC monetary policy announcement, rising against sentiment-linked currencies while falling against "risk-off" alternatives.

Fed stimulus since 2008-09 slashed returns on safer assets and encouraged a reach for yield outward along the risk spectrum. The growing proximity of stimulus withdrawal since mid-2014 might have been expected to begin reversing this dynamic. Various false starts failed gain traction however even as the US Dollar embarked on a long-lasting rally to reflect the looming policy shift.

This warns that a period of portfolio readjustment is still pending and may be triggered in earnest once the rate hike is finally a reality. The ensuing risk aversion may bode ill for the sentiment-linked Australian and New Zealand Dollars, sending them downward alongside stock prices, while boosting funding currencies like the Euro and the Japanese Yen.

--- Created by Ilya Spivak, Currency Strategist for DailyFX.com

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