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Is a Firm US Dollar a Deterrent to a Fed Rate Liftoff?


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With the FOMC decision upon us, the market is already looking ahead to the December meeting and whether the central bank will keep a rate liftoff on the table. This will be important to all global markets after the ECB rejoined the currency war last week despite Draghi saying that fx is not a policy tool as his dovish comments sent the EUR tumbling. If you believe that forex is not a policy tool then you also believe in the tooth fairy.

This puts the ball back in the Fed’s court as it has to weigh the impact on the dollar of any decision to start normalizing rates even if it tries to downplay the impact of the exchange rate.

Think about it. A rate liftoff or even expectations that it will start sooner rather than later would increase the value of the dollar. A firmer dollar, in turn, would weigh on commodities, especially crude oil. This would increase global concerns (e.g. emerging markets) and dampen US inflation expectations, making it harder for the Fed to achieve its 2% target. It would also increase concerns over an already struggling manufacturing sector where the dollar continues to be cited as a headwind on earnings.

So, the Fed is caught in the currency war after Draghi undercut the EUR and weakened it vs. the dollar, removing what would have been a cushion (i.e. weaker dollar) that would have made it easier for the Fed to consider a liftoff. Now, with the dollar back on a firmer footing, the Fed has less leeway to speed up liftoff without sending the currency higher as technicals have moved back in its favor.

What does this suggest for the FOMC meeting? Most likely we will see a cautious Fed.  Even if it leaves a December rate hike on the table, it would take stepped up rhetoric to convince a skeptical market that has pushed out expectations of a rate liftoff into 2016.

Jay Meisler, founder

Global Traders Association

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Forex , Central Bank , Currencies


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