HSBC and JP Morgan, the biggest supporters of the dollar on Wall Street say the currency’s ascent is set for a decline as the Federal Reserve cuts their interest-rate forecasts. The Fed’s move brought the dollar’s 20% rally to a halt.
U.S. Dollar's Bull Run May Be Headed For Its End
The Bloomberg Dollar Spot index fell by 1.8% on March 18, the largest slump in six years prior to recouping some of its losses on March 19.
David Bloom, the head of currency strategy at HSBC said, ‘The dollar is coming closer and closer to its end. The dollar bull needs to be propped up and new emerging factors now challenge the unanimous view that the dollar can continue to sustainably extend.”
JP Moran Chase & Co. also expressed the same views as HSBC and it is moving away from hitherto bullish opinions about the dollar. Consequently, there is plenty of doubt over whether the greenback’s rally can progress on its upward trend.
According to JP Morgan, the dollar could likely be in its early bubble. This proposition puts a damp on the ability of the U.S. economy to weather the storm and to withstand lower inflation if the currency appreciates.
On March 18, Federal Reserve policymakers cut back their 2015 federal funds rate forecast from 1.125% to 0.625%. This is a clear indication that the Fed is having a hard time increasing the interest rates.
Meanwhile, central banks around the world from Asia, Europe to Japan are cutting interest rates to boost growth and alleviate deflation, in effect devaluing their currencies. The fact that the U.S. is keen on rising interest rates while the rest of the world is cutting rates as has been a driving force for a very strong dollar.
In 2015, the inflation rate in the U.S. has declined below the Fed’s target of 2%, while economic growth has been slow. According to Janet Yellen, the Fed Chair, exports will significantly drag economic growth throughout the year, pegging this to the performance of the dollar. Yellen said this is a partial reflection of the health of the country’s economy.
Paul Meggyesi and John Norman, strategists at JP Morgan indicated that, “Perhaps the most problematic part is the valuation, which suggests that the dollar’s current level is only justified with a 3.5% Fed funds rate.”
They further added that, “The strong dollar is an indication of a below-target inflation and slow growth.”
Market ImpactAs investors anticipate a decline in the bullish dollar, the EUR-USD currency combination continues to be surprisingly bullish. In effect, the surprise index for the euro zone has done so much better than the economic surprise index in the U.S. in 2015.
Valuation indicates that the greenback is still strong; in fact, it is the second strongest right after the Swiss Franc.
The bullishness of the U.S. dollar has been so pervasive that it is becoming unsustainable to extend the ascent.
It is worthwhile noting that every time there is a Fed interest rate hike, the US dollar typically slumps almost immediately following the first cycle of rate rises.
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