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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