USD upside risks should be contained to near-term

Analysts at MUFG Bank point out that their assumption of ‘more of the same’ from the Federal Reserve meeting this week was wrong and the outcome has already been considerable and there are clear upside risks to the US dollar. They argue though that the Fed will not want to see a repetition of what happened in 2013 when inflation expectations fell back sharply after the ‘taper tantrum’. According to them, Fed's officials next week will try and reassure markets on its new more dovish monetary policy strategy announced last year that is already being doubted.

Key Quotes:

“The FOMC fallout in FX was clear with DXY up 2.0% since the announcement on Wednesday. The basis of our USD bearish view through the remainder of this year (DXY 87.000 at year-end; now a 5.3% drop) was that the Fed would be ultra-cautious in moving away from its current monetary stance given the new monetary policy framework announced last year that moved the Fed to an inflation averaging regime that effectively meant a much later than previous move away from monetary easing. Should this now be discarded as a view? There is a clear and obvious risk of that now and we will have to adjust our USD weaker forecast profile. For now the shift in the DOTs is getting much more focus than the lack of shift in the guidance of tapering with “further substantial progress” needed before tapering can begin.”

“We would argue though that the Fed will not want to see a repetition of what happened in 2013 when inflation expectations fell back sharply after the ‘taper tantrum’. We now have a ‘DOTs tantrum’ and we suspect Fed Chair Powell and others next week will try and reassure markets on its new more dovish monetary policy strategy announced last year that is already being doubted.”

“The fallout from the surprise shift in the DOTs profile could well see the dollar extend further over the short-term. However, an abundance of liquidity and possible Fed communication intervention should mean we avoid a sustained ‘DOTs’ tantrum!”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.