US Dollar Index plunges as fears grow on policy indecision

Probably the biggest news story at the moment has to be the sudden drop off in the US Dollar against other major currencies following market expectations that a rate hike is looking less than likely to happen this year. This after the Bank of Japan added to a growing list of central bankers who have opted to drop the level of interest rates below zero opening up Pandora's Box to unknown outcomes never experienced before that could have profound effects in years to come.

With the uniformity of world economies out of sync the Fed is facing a difficult task of trying to convince the market that lifting rates in the current economic climate is the right strategy to follow. As more evidence is pointing to a fragile world economy markets seemingly weigh down sentiment that paints a worrying picture for the future.

The US Dollar Index which measures the US Dollar relative to 6 other major currencies and is the most widely followed currency index suffered its worst 2 day drop in 7 years. That would take us back to the height of the Financial Crisis when armageddon ruled fear and everything seemed to be piling up into a heap of catastrophe in financial markets.

However the most striking difference between those times and the current outlook is that we are at the lower bound of the interest rate cycle and much of what was thought to have happened has failed to materialise as it the case with the ECB and BOJ who have both deserted the normalisation process and dropped their interest rates into the abyss.

Added to the fact that the world is facing an oil glut that has suppressed prices to lows last seen over a decade ago, there doesn't seem to be much similarity between this time and 2008.  

Herein lies the problem; if other central bankers such as the ECB and BOJ who have artificially fuelled their economies with copious amounts of "free money" did so by following the same action as the Fed had been executing and now face the risk of a stalling economy, what are the risks that the US economy faces the same problematic issue?

US Dollar Posts Biggest 2-Day Drop in 7 Years as 2016 Rally Erased https://t.co/hVvzyrok4O via @business pic.twitter.com/LBG9NPmHNL

— Dan Popescu (@PopescuCo) February 4, 2016

But although the drop triggered off a number fanfare in search of the relative depth of the move, the sarcasm wasn't too far away to shout down the chorus of concerns by dollar bears hoping to break the momentous rally the bulls have been able to pull off over the past year. In all truth the relevance of a 2 day decline is miniscule when considering the overall run its had.

Observing the chart there does remain a risk of the Dollar Index falling lower here if you were to look at the longer term view with the price grinding up against the 100 resistance. If market sentiment is right and we don't see the Fed act in 2016 the risk of a reversal in the decision to hike rates would become a possibility and the Fed could even follow suit of other developed economies by dropping rates below zero.

If that scenario were to play itself through this year we could very well see a big pullback in Dollar strength that would destroy all hopes of the normalisation process taking place. That would certainly be a big credibility killer if the Fed were to make that decision.  

ANALYSIS: Brutal, historic plunge in the US Dollar index, just in the past 45 years. pic.twitter.com/NCzMaCsTTZ

— Rudolf E. Havenstein (@RudyHavenstein) February 3, 2016