The Fed Is Holding Back the Dollar

Ever since the Federal Reserve laid out the process of balance-sheet normalization in June 2017, the dovish declines in rate expectations of board members have been important marginal differentiating factors for future central bank policy. These changes underscored the institution's persistent over-forecasting of its policy rates. A more dovish federal funds rate policy trajectory could keep the dollar under pressure, even if the U.S. currency receives a boost after last week's Fed statement and balance-sheet normalization announcement.

Plus, monetary tightening is afoot globally. The Fed’s decision to begin the reduction of its balance sheet in October 2017 is just one of many recent indicators that the tide of global monetary policy is changing. On Sept. 6, 2017, the Bank of Canada surprised markets with a 25 basis-point rate hike, and on Sept. 14, 2017, the Bank of England hinted at future increases. Logically, Canada's dollar spiked on the Canadian central bank announcement, and the pound surged to near pre-Brexit levels on the Bank of England hints.