R.I.P. Dollar Rally as Dovish Fed Spurs Worst Slump Since 2011

Will Dovish Fed Be the Death of the Dollar Rally?
  • Greenback hit lowest since October 2014 versus yen this week
  • Morgan Stanley, Macquarie forecast further dollar weakness

The dollar headed for its steepest three-week slide in more than four years as an increasingly cautious Federal Reserve spurred analysts and investors to reassess forecasts for the greenback.

A Bloomberg index tracking the U.S. currency against 10 major peers climbed from an eight-month low reached Friday, two days after Fed officials unexpectedly cut projections for interest-rate increases to two this year from the four they estimated in December. Macquarie Bank Ltd. and Morgan Stanley, two of the world’s top 10 currency forecasters, are highlighting the risk of more dollar weakness.

“The fact that they didn’t raise rates and wound back expectations for future increases in 2016 has obviously hurt the U.S. dollar,” said Derek Mumford, a director at Rochford Capital Pty in Sydney. “That can continue in the very near term.”

The Bloomberg Dollar Spot Index rose 0.2 percent to 1,185.52 as of 6:28 a.m. in New York, having fallen earlier to 1,180.83, the lowest since June 30. It has dropped 3.7 percent since Feb. 26, poised for the biggest three-week slump since October 2011. The greenback has depreciated at least 0.4 percent against all of its Group-of-10 peers since March 11.

Fed’s Outlook

The Fed meeting prompted investors to question whether the dollar’s rally has run out of steam. Bloomberg’s gauge had climbed 37 percent between its 2011 low and the closing peak reached on Jan. 22 of this year, as the promise of superior economic growth and rising interest rates contrasted with sluggish economic activities elsewhere.

QuickTake The Almighty Dollar

“In terms of the relative difference in interest rates, the rally is over,” John Silvia, chief economist at Wells Fargo Securities LLC, said in an interview on Bloomberg Television’s “Countdown” with Manus Cranny and Anna Edwards. “The Fed has said we’re not going to be pushing this game like we were expected too.”

JPMorgan Chase & Co. lowered its year-end forecast for dollar-yen to 103 from 110 the same day. The median estimate is 120 among more than 60 analysts surveyed by Bloomberg.

The dollar was little changed at 111.38 yen Friday, on track for a 2.2 percent slide this week. It reached 110.67 on Thursday, the lowest since October 2014. The greenback gained 0.4 percent Friday to $1.1268 per euro, paring its weekly decline to 1 percent.

‘More Dovish’

“The Fed has become much more dovish -- the market realizing maybe the Fed being a little bit more behind the curve,” Dominic Schnider, the head of commodities and Asia-Pacific foreign exchange at UBS Group AG’s wealth-management unit in Hong Kong, said Friday in a Bloomberg Television interview. “That’s simply not good for the dollar, and so we have this generic dollar weakness right now which will not disappear in the very short term.”

While Morgan Stanley and Macquarie agree on the prospects for near-term weakness, they remain dollar bulls.

The greenback will decline over a one-to-three month horizon, after which it will begin climbing again on a resumption of Fed tightening amid looser policy elsewhere, Macquarie strategists Nizam Idris, Gareth Berry and Teresa Lam wrote in a report Thursday.

“The falling USD has the characteristics of a pain trade that seems to have further to run,” Morgan Stanley analysts including Hans Redeker, the global head of currency strategy, wrote in a note the same day . However, “for the USD to experience a long-term trend change requires more than a dovish Fed.”

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