Fed Member Comments Drive Dollar Index Higher

With the U.S. Federal Reserve poised to hike interest rates as early as next month, the dollar will rise in the coming year, but by how much will depend on the course of monetary policy, a Reuters poll found.

The driving force behind the dollar’s 18-month surge is expectation the U.S. rates will rise this year, even as most other major central banks maintain their accommodative stands.

The dollar index .DXY hit a 3-1/2 month high against a basket of currencies early on Wednesday after Atlanta Federal Reserve President Dennis Lockhart expressed support for an interest rate hike in September.

All but four analysts in the poll have penciled in September for when the Fed will lift interest rates for the first time in almost a decade. The remaining four said December.

But the latest poll of more than 60 analysts, taken this week, showed the euro EUR= will fall only slightly in the coming year, with only a one-in-three chance for the single currency to fall to or below parity with the dollar.

That suggests much of the shifting landscape for global central banks has already been priced in and instead the path of the Fed’s tightening cycle will drive currencies.

“Whether it is September or December will make little difference to the FX market: what matters more is the pace of the tightening cycle,” wrote Vasileios Gkionakis, Global Head of FX Strategy at UniCredit.

via Reuters

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza