Fed disappoints dollarBy Arnaud Masset
The US Federal Reserve yesterday lifted its base interest rate 0.25% to 1.50-1.75% and stated its optimistic view of the US economy, but still, the US dollar has been under heavy selling pressure since yesterday evening. The dollar index fell 89.3 following the announcement and kept losing ground on Thursday morning to reach 89.40 as investors seemed disappointed. It seems they were expecting a much more aggressive path of tightening. Although there was lots of talk of four rate hikes this year, according to the dot-plots, it won’t happen.
Meanwhile, the Fed has started unloading its massive balance sheet, which will take years. The central bank’s caution could be explained by its unwillingness to disturb financial markets. President Donald Trump’s recent decisions will widen the deficit, the federal government seems constantly on the brink of shutdown, and the threatened trade war is not improving market sentiment. It seems the Fed is waiting to see how its balance sheet unwinds before making more hawkish moves.
The Fed raised its growth forecast once again. The US economy should grow 2.7% in 2018, up from its December forecast of 2.5% and its September one of 2.1%. Unemployment should end the year at 3.8% (3.9% in December and 4.1% in September). Inflation forecasts are roughly unchanged: core inflation stays at 1.9% but will increase 2.1% in 2019. Two more rate hikes are expected in 2018, and two more again in 2019.
Trump disappoints dollarBy Peter Rosenstreich
After ‘Rexit’, the departure of Secretary of State Rex Tillerson, and the entrance of Larry Kudlow and friends pushing punitive actions against China, just about anything could happen on a given day at the US White House. Later today, Trump is expected to announce tariffs on Chinese imports. The objective, say Trump’s latest Tweets, is to curb theft of US technology. Size and scope of the tariffs are unclear, which fit with Trump’s ‘make it up as he goes along’ approach. We doubt his actions will accomplish their aims, and we fear they will mainly trigger rapid, serious retaliation. Beijing is unlikely to sit quietly: this significantly increases the risk of a global trade war.
USD remains sensitive to protectionism. The dollar will not walk away from this unscathed. Should Trump announce significant escalations, we would rotate into European G10 (SEK, NOK and CHF). Higher US yields have not supported USD and are unlikely to protect from geopolitical tensions.