Fed’s Newfound Focus on Data is Bad News for the Sliding Dollar

The Fed’s newfound focus on data is bad news for the sliding dollar

George Glover 
Jul 29, 2023, 7:25 AM EDT

• The US dollar has slipped against other currencies this year.
• Its losing streak could carry on with the Fed taking a “data-dependent approach” to interest rates.
• The greenback would become less attractive to foreign investors if the central bank stopped tightening.

The dollar is one of the few assets that’s gone down, rather than up this year – and analysts are warning that there could be bleaker times ahead for the greenback now that the Federal Reserve looks set to wind down its interest-rate hiking campaign.

The US Dollar Index, which tracks the buck against a basket of six other currencies, including the euro, the British pound, and the Japanese yen, has dropped 3% year-to-date and 10% since September.

After being one of the few winners in a hellish 2022 for markets, it’s been lapped by stocks this year, with the benchmark S&P 500 index up 19% and the tech-heavy Nasdaq Composite jumping 35%.

And the pain looks set to continue for the currency, which fell again after the Fed announced a shift in its approach to tightening this week.

Chair Jerome Powell said the central bank would start taking a “data-dependent approach” to rate hikes, with inflation cooling rapidly and the jobs market holding firm.

Per CME Group’s Fedwatch tool, the majority of traders believe it raised borrowing costs for the final time this cycle Wednesday, when it brought in a 25-basis-point hike.

When interest rates stop rising, the dollar becomes less attractive to foreign investors seeking higher yields, meaning the currency is likely to weaken against its rivals.

The key number for currency traders to watch going forward will now be the monthly inflationary print, analysts said. 

The rate of price rises has sharply fallen to just 3% in recent months. If that cooling carries on, the dollar will likely keep sliding – but any flare-up could encourage the Fed to bring in further rate hikes, which could offer some support to the currency.

Powell’s comments were “taken as dovish at the margin by markets on anticipation that the recent disinflationary trend will continue,” Saxo’s head of foreign exchange strategy John Hardy said Thursday.

Source: Markets Insider

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