Thursday 4 February 2016

The dollar plunges as expectations on Fed to hike this year dims

When the Fed craftily snuck in an interest rate hike late last year when Christmas cheer had taken over, not many had taken the time to study what had been said during the press conference after the decision was made and only once the holiday spirit was gone and markets had gotten back into full swing did everyone realise the true implications. It was if the Fed was suffocating the global financial system with its necessary hike at a time where uncertainty surrounding China had yet faded too far from the thoughts of concern.

FOMC members had signalled that it was their belief that the US economy was strong enough to sustain four interest rate hikes in 2016 which seemed a little over ambitious at the time. The US has been growing steadily since the Fed took the decision to pump billions of dollars into the economy to advert a catastrophe but the jury is still out over whether it succeeded in reviving the system or made the situation worse.

Things however have shaped up much differently to what the Fed thought they would be and the short amount of time in which the change occurred highlights the fragility of the global economy. We heard last week how the Bank of Japan had decided to drop interest rates below zero for the first time in its history, a situation that's become familiar with those living in the Eurozone who initiated the same strategy late last year in response to lack of demand and looming deflation.

ECB president Mario Draghi said at a forum in Davos last month that he foresaw the central bank accommodating the economic zone for longer period than expected and if the necessity arouse, further drops into negative territory for interest rates.  
Because the US falls into the same category as these economies, its fair to assume that the pathway sketched out by a member of this group often marks a trend that is likely to materialise in the economies of other members at some time in the future giving policymakers sufficient warning of the risk that may lie ahead.

Considering the heightened volatile climate that has been created by China, the two examples explained above only serve to exacerbate proceedings with much of the weight resting on US shoulders to carry things forward. Knowing fully well that this is not an easy task given the unparalleled nature of world economies at present , the Fed will have no choice but to suspend hiking rates for the time being as its eagerness to see the interest rate normalisation process being accomplished looking less likely.

Rumours have begun to swirl amongst participants after it was reported that the Fed had asked banks in a survey, the impact negative interest rates may have on their business should that outcome happen. If this doesn't signal a willingness of the Fed to embark on such policy measures to abate further economic weakness then I don't know what does.

This after the market had taken the US Dollar Index to fresh highs in years, expecting the normalisation process to further strengthening the Dollar against both major and emerging market currencies. Last year emerging markets had to fend off severe headwinds in their currencies as dollars originating from the Quantitative Easing program that were seeking above zero percentage returns started to unwind and make it way back home.

As a result, commodities saw their prices shrink to multi-decade lows as the dollar strength made the purchase of these goods more expensive than they had been a few years earlier in effect dissuading Chinese producers from gobbling up as much as possible, even when faced with the reality of economic contraction of its own making.

To emphasize the sensitivity the dollar is having on commodity prices one only has to look at the price movement we are witnessing today after the slump in the dollar following the news. If a incremental down move can have such a rousing response in commodity prices you have to wonder if perhaps we may be past the worst of the storm but only time will tell.  
Posted by at

No comments :

Post a Comment

Subscribe to: Post Comments ( Atom )