- The US dollar surged after the Federal Reserve cut interest rates on Wednesday, with an index tracking the currency climbing to its highest level in more than two years.
- President Trump, who has long called for the Fed to cut rates and a weaker dollar, was critical of the move.
- Elsewhere in markets, stocks tumbled and bonds rallied after the Fed signalled that the cut wasn’t the start of a prolonged rate-lowering cycle.
- Read more on Markets Insider.
It’s not what Trump was hoping would happen.
The US president has long called for a weaker dollar, which would provide a boost to US exports. Meanwhile – in the midst of a global trade war – he’s accused both China and Europe of currency manipulation, a practice that he says he hates.
The president also brought up the dollar’s strength in interviews with Judy Shelton and Christopher Waller, who he’s nominated for seats on the Fed’s board, Bloomberg found.
Dollar strength is generally influenced by interest rates, meaning that a cut in rates would lead the dollar to fall. Usually, easing monetary policy should lower currency and boost riskier assets such as stocks.
But when the Fed did lower interest rates by a quarter-point on Wednesday, the market reaction to the rate cut was “totally the opposite” of what usually happens, said Hussein Sayed, chief market strategist at FXTM in an email. The S&P 500 fell as much as 1.8%, its biggest loss in two months, and the dollar went up, extending its 2019 rally further.
This is because of the size of the cut and Federal Reserve Chairman Jerome Powell’s language after it was announced. While lowering rates is dovish, Powell was far more neutral in his statement following the decision, saying that the cut was a “mid-cycle adjustment” and didn’t signify the beginning of a cutting cycle
That, in turn, set up markets to worry that this cut is the only one they will see for a while. Markets had initially priced in as many as three cuts by the Fed before the end of the year.
The Fed’s “insurance” cut and less-than-dovish sentiment for the future set up the dollar for another period of strength, wrote analysts at Monex Europe in a note Wednesday.
“With the threat of a big easing cycle dented, the dollar is once again left as the king of real yields and therefore the dominant global currency,” they said.
In particular, the dollar has gained against the euro and the pound, which is being dragged down by Brexit.
Others say this behaviour from the dollar is normal.
“Historically the US has tended to weaken into precautionary (as opposed to recessionary) rate cuts and strengthen thereafter,” wrote a team of analysts led by Chirag Mirani, a strategist at UBS in a note Wednesday.
It appears that this scenario is playing out again – at least in that the dollar is climbing post-rate cut.
In addition, the dollar is outperforming other G-10 currencies this year. Even after the Fed cut the interest rates in the US, they are higher than interest rates in other countries – especially as Europe and Japan hold onto very low rates.
For investors, that means that being position long the dollar is still a place to gain.
“There’s one game in town and it’s called the US dollar,” Simon Harvey, an FX market analyst at Monex Europe, told Markets Insider.
At this point, it seems unlikely that the dollar will see a sell-off unless global growth picks up faster than the US – and right now, there are few signs that will happen. Overall, the global economy has showed signs of weakness, and US strength is keeping it afloat.
There is a risk to the dollar’s current strength, Mirani wrote. The US Administration could comment further on the recent strength of the dollar, or potentially decide to try to make it weaker.
“In our assessment, the probability of FX intervention is low and even if it were to happen, would not lead to sustained USD weakness,” wrote Mirani.
The view that manipulation of the dollar is likely is off the table holds up to what the Trump administration has said. Recently, White House economic adviser Larry Kudlow said that the administration has ruled out artificially weakening the dollar.
He said in an interview with CNBC: “We don’t want that kind of manipulation… We have as a matter of policy ruled out currency intervention.”
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