The Hated Dollar Resurges. But Why?
The Hated Dollar Resurges. But Why? by Wolf Richter – Wolf Street
Betting against the dollar remains a favorite sport.
The dollar has done – as it so often does – the opposite of what was expected. Last December, the Fed raised its target for the federal funds rate and indicated that this time it was serious about tightening and that it wouldn’t flip-flop anymore. Two weeks later, the dollar, after surging much of 2016, turned around and headed south in defiance of the Fed.
On September 8 intraday, the dollar index (DXY), which tracks the dollar against a basket of currencies, hit the lowest point since December 2014. In a little over eight months, it had dropped 12% from its intraday peak on January 3. But that was it. Since September 8, it has bounced nearly 3%. The chart shows the weekly movements:
Since early September, the dollar has bounced against the euro, the yen, the Canadian dollar, the Mexican peso, and the Chinese yuan between 2% and 6%. Based on the dollar index, the dollar has now risen four weeks in a row, though this morning, it is taking a breather. September 8 also coincides with the recent peak in the gold price expressed in US dollars — seen another way, the dollar has since risen against gold.
So why the dollar’s bounce?
One theory, among many, is that currency exchange markets – after blowing off the newly hawkish Fed for months and expecting it to flip-flop any moment, as it had done relentlessly starting in 2014 – are considering the possibility that the Fed might not flip-flop this time.
One more rate hike in December is likely. The Fed indicated after its last meeting that three more rate hikes next year seem likely, which would bring the Fed’s target range for the federal funds rate to 2% to 2.25%, up from around 0% not long ago – “low” inflation, no problem.
But more importantly, in September the Fed announced the start-date of the QE unwind, after having announced the mechanics and amounts in June. The QE unwind has now commenced. And the members of the FOMC voted for it unanimously.