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14 Aug 2015
Delayed Fed hike expectations - BTMU
FXStreet (Barcelona) - Lee Hardman, analyst at Bank of Tokyo-Mitsubishi UFJ, Ltd. explained the US dollar weakened sharply yesterday caught up in the fall out from heightened investor concerns over the devaluation of the renminbi.
Key Quotes:
"It has prompted a period of more risk-averse trading conditions driven by heightened concerns over the outlook for global growth and stronger disinflationary headwinds. The temporary setback for the US dollar is further evidence that it is now trading more like a pro-growth currency.
The US dollar has also been undermined by dampened expectations for Fed rate hikes with the timing off the first rate hike seen as more likely now towards year end. Heightened investor concerns over global growth especially in China, the potential for a stronger US dollar if the renminbi devaluation prompts another wave of emerging market currency weakness, and renewed weakness in commodity prices have all combined to dampen expectations for Fed rate hikes. If the renminbi devaluation remains modest then the impact on Fed policy is likely to prove limited, although a sharper economic slowdown in China and resulting negative spill over impact would be of greater importance for the US economy. US exports and imports to China accounted for only 1.0% and 2.8% of GDP respectively in 2014.
Fed Vice Chair Dudley stated yesterday that “hopefully, we’re going to make progress in terms of our goals…and so hopefully, in the near future, we’ll be able to actually begin to raise interest rates.” He also stated that the any weakening in the renminbi that was in line with slowing Chinese growth was understandable. However, it was still too soon to draw firm conclusions about what this means.
Even if the Fed remains on hold for a little longer the negative impact on the US dollar should prove fleeting. The US dollar has strengthened sharply over the last year as the Fed has remained on hold driven by negative developments overseas which have improved its relative appeal. Even now overseas central banks are more likely to ease monetary policy further making the Fed appear relatively more hawkish. "
Key Quotes:
"It has prompted a period of more risk-averse trading conditions driven by heightened concerns over the outlook for global growth and stronger disinflationary headwinds. The temporary setback for the US dollar is further evidence that it is now trading more like a pro-growth currency.
The US dollar has also been undermined by dampened expectations for Fed rate hikes with the timing off the first rate hike seen as more likely now towards year end. Heightened investor concerns over global growth especially in China, the potential for a stronger US dollar if the renminbi devaluation prompts another wave of emerging market currency weakness, and renewed weakness in commodity prices have all combined to dampen expectations for Fed rate hikes. If the renminbi devaluation remains modest then the impact on Fed policy is likely to prove limited, although a sharper economic slowdown in China and resulting negative spill over impact would be of greater importance for the US economy. US exports and imports to China accounted for only 1.0% and 2.8% of GDP respectively in 2014.
Fed Vice Chair Dudley stated yesterday that “hopefully, we’re going to make progress in terms of our goals…and so hopefully, in the near future, we’ll be able to actually begin to raise interest rates.” He also stated that the any weakening in the renminbi that was in line with slowing Chinese growth was understandable. However, it was still too soon to draw firm conclusions about what this means.
Even if the Fed remains on hold for a little longer the negative impact on the US dollar should prove fleeting. The US dollar has strengthened sharply over the last year as the Fed has remained on hold driven by negative developments overseas which have improved its relative appeal. Even now overseas central banks are more likely to ease monetary policy further making the Fed appear relatively more hawkish. "