Dollar Pauses After Touching Highest Since 2002 Post-FOMC

Updated on
  • Option volume rises as dollar calls in demand, vols higher
  • Euro-dollar seen heading toward parity amid policy divergence

Stronger Dollar in a Post-Trump World

The dollar paused for breath following a headlong dash higher after the FOMC raised rates and boosted its projection for 2017 rate hikes, extending post-election gains for the greenback, which remains a buy on dips for traders who say the long dollar trade is far from crowded.

FX flows dwindled from the more hectic pace of earlier in the session, with dollar dips still quite shallow as new buyers quickly appeared, traders said. Dollar demand was seen from fast-money accounts, macro hedge funds and real-money players looking to rebuild, or add to, longs that were trimmed earlier in the week ahead of FOMC meeting.

  • Trading flows may slow ahead of the weekend as liquidity starts to dwindle; trading volume likely to shrink further next week as markets quiet down around the Christmas and New Year holidays; price volatility may also increase, traders say
  • Those concerns may have driven some to seek refuge in the options market, which saw strong demand for USD calls, notably vs EUR and JPY, as volume rose ~16% above the average of the last 5 Thursdays and vols rose across most tenors, traders said
  • While the USD is still attractive on dips, that buying may turn more selective over the coming weeks, traders say
  • The USD gained additional momentum after a round of U.S. data exceeded expectations; the Empire manufacturing index rose to 9 vs est. 4 and the Philadelphia Fed business outlook surged to 21.5, beating estimates for 9.1
  • Analysts have been quick to recalibrate their FX and market outlooks after the FOMC; several, such as Nomura’s Bilal Hafeez, see the EUR moving toward parity vs the USD, though UBS strategists led by Drew Matus have urged a cautious approach, suggesting that the Fed is still taking “a wait and see attitude”
  • GBP fell to 1.2376, its lowest in about a month, after the BOE left rates and policies on hold, as expected
  • EUR/USD fell to 1.0367, its lowest since January 8, 2003, seeing brisk selling after breaching 1.0500 during European hours, traders said; USD/JPY surged to 118.66, its highest since February, and within striking distance of the 2016 high ~121.69