AT THE beginning of the year the dollar was on a tear. In trade-weighted terms, it had risen by almost 20% since the start of July 2014. With the Federal Reserve tightening interest rates for the first time since 2006, the greenback seemed destined to head higher.
In fact, doubts were already emerging. In mid-December fund managers polled by Bank of America Merrill Lynch thought that being bullish about the dollar was the most overcrowded trade in the financial markets and that the currency was overvalued.
The dollar continued to rise for the first three weeks of the year but then the tide turned: since January 20th, the currency has fallen by 3.8% in trade-weighted terms (see chart). The main reason may be a perceived shift in Fed policy; as the year began, investors were expecting three or four rate increases in 2016. The latest statement from the central bank suggests that only two rises are on the menu.
The dollar’s ascent may have played a part in the Fed’s stance, since a stronger currency, by itself, represents a tightening of monetary conditions. The central bank has lowered its forecast for growth this year...Continue reading
Source: Business and finance http://ift.tt/1Y24GSa
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