Here’s why the Fed’s latest move has dollar bulls doubting themselves

The Federal Reserve chair acknowledged the negative consequences of this year\'s gains Wednesday, saying the currency is weighing on U.S. exports and inflation as policy makers pared back their outlook for interest-rate increases.

Janet Yellen just instilled some doubt in dollar bulls.

The Fed chair acknowledged the negative consequences of the year\’s gains Wednesday, saying the currency is weighing on U.S. exports and inflation as policy makers pared back their outlook for interest-rate increases. That sent the greenback down by the most in six years and prompted some analysts to suggest the rally will pause carrying out a 14% gain in yesteryear six months.

Central banks may not like guidance, but investors sure do

The U.S. Federal Reserve is clearly still trending towards providing less clarity to the market, but on Wednesday it finally allow the \”patient\” penny drop, opening the door wider for a rate hike while at the same time assuring everyone it\’s not going to do so until it you can bet the U.S. economy is on track.

\”Just because we removed the term patient in the statement does not mean we are going to be impatient,\” Fed Chair Janet Yellen said in a press conference in Washington. Now, one of the toughest yet most important challenges for business leaders is deciding how they will make decisions. Keep reading.

\”They clearly do worry about the dollar, and also the Fed\’s important for the dollar trend,\” Jens Nordvig, md of currency research at Nomura Holdings Inc. in Ny, said by telephone. \”We\’re going to possess a couple of months of consolidation.\”

The dollar\’s ascent has been fueled by the Fed\’s plans to raise borrowing costs this year at a time when central banks are easing from the euro area to Canada and Australia. Sweden\’s Riksbank became the newest to drive down its currency this week, lowering its key rate of interest outside of its schedule for policy decisions.

The Fed\’s indication that it will raise rates slower than it previously predicted sent the Bloomberg Dollar Spot Index down 1.8% Wednesday to 1,194.89, the biggest drop since March 2009. Nevertheless, in a sign of the U.S. currency\’s underlying strength, the index — that is weighted against peers including the euro and yen — rebounded 1.1% Thursday to at least one,208.24 by 8:25 a.m. London time.

They clearly do care about the dollar, and the Fed\’s important for the dollar trend

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The Fed \”can\’t disregard the stronger dollar\’s implications for growth,\” Alan Ruskin, the worldwide head of Number of 10 foreign currency at Deutsche Bank AG in Ny, said by e- mail. \”The U.S. dollar\’s gains have reached the point where they\’re willing to indirectly protest dollar strength.\”

Policy makers cut their estimate for that federal funds rate at year-end to 0.625%, down from the forecast of just one.125% in December. The outlook for 2016 fell to 1.875% from 2.5%.

The greenback has something to do with the cuts to those projections. Yellen, who also lowered her assessment of the economy, said the strong dollar has weighed on consumer prices and led to weak export growth and low import prices.

\”It puts the U.S. dollar increasingly on the radar — now we all know the Fed has its own eye on it, and the impact on exports and growth,\” Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG in New York, said by e-mail. \”We are simply seeing some consolidation following a very strong U.S. dollar relocate recent months.\”

While Yellen has downplayed the idea of a global currency war, the Fed has stood out for its intends to raise rates as other nations devalue their currencies to spur economic growth and fight deflation.

Her remarks Wednesday prompted money-market traders to push out their expectations to have an initial rate increase and also to lower bets for how quickly borrowing costs will climb. Futures contracts show a 38% likelihood that the Fed will raise its benchmark by its September meeting, down from the 55% chance seen before the Fed\’s statement.

\”What it means for the dollar is interim weakness,\” said Jennifer Vail, head of fixed-income research in Portland, Oregon at U.S. Bank Wealth Management, which manages $126 billion. \”The dollar will climb again.\”

Hedge funds along with other large speculators increased net bullish bets around the U.S. currency\’s strength versus eight major peers to 435,439 contracts within the week to March 10, the greatest level inside a month, according to Commodity Futures Trading Commission data published by Bloomberg.

\”You hardly ever hear the Fed comment about currency,\” said Gary Pzegeo, the Boston-based head of fixed income at Atlantic Trust Group Inc., which manages $27 billion. \”I\’m not surprised that they\’re paying attention to it and I\’m further not surprised that they\’re reacting into it because it comes with an impact on the inflation outlook and the growth situation.\”

–With the help of Rachel Evans and Susanne Walker in Ny.

Bloomberg.com

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