The greenback nosedived on Wednesday on the back of the Federal Reserve’s policy statement, sparking calls for a correction given its recent rally, but dollar bulls aren’t shying away.
“Six months forward, we expect the dollar to be trading 3 to 5 percent above current levels,” said Kathy Lien, managing director at BK Asset Management, in a note late on Wednesday.
The U.S. dollar index (New York Board of Trade (Futures): =USD) endured its biggest single-day decline in six years on Wednesday, retreating from recent twelve-year highs, after the Federal Reserve dropped the word ‘patient’ from its policy statement, signaling its intention to raise interest rates this year. Its fall saw the euro (Unknown:EURBA=) bounce off a twelve-year low and lifted the yen (Exchange:JPYUSD=) to a three-week high.
The dollar’s decline was atypical given the prospect of tighter monetary policy, but experts attributed the drop to the Fed’s lower growth and inflation forecasts, which pushed back expectations for a rate hike in June.
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“U.S. front-end rates fell sharply in response [to Fed projections], with the market substantially reducing pricing for a June rate hike and reducing pricing for cumulative tightening by the end of 2016 by nearly 25 basis-points,” said FX analysts at BNP Paribas in a note shortly after the Fed statement.
However, experts warn the slide isn’t expected to last as they believe U.S. rates are still headed higher this year, so investors should take advantage of Wednesday’s collapse to buy at lower levels.
“We believe that there is a fire sale in the U.S. dollar right now and if you don’t buy in the next few days or weeks, you may regret it,” Lien added. She also noted that the dollar’s losses following changes to Fed forward guidance in the past were temporary. She expects a rate hike in September.
“When the dust settles, we think the strong USD consensus will remain very-much intact and there will be good interest to add to USD longs at current levels,” agreed BNP Paribas. The bank is also betting on a 2015 hike, pointing out that all but three of Fed Committee members expect to hike by at least 50 basis points.
Mitul Kotecha, head of FX strategy, Asia Pacific at Barclays, told CNBC that he also expects further dollar strength in anticipation of a September rate hike. “The reality is that we’re still going to see a very divergent monetary policy path globally and that means overall, the dollar is still going to rise.”
Some believe the Fed’s statement was the perfect catalyst for a healthy correction in the greenback following the dollar index’s impressive 8 percent year-to-date rise.
“Like the decline in oil prices, the rise of the dollar has been too abrupt and too far, the negative impact to the dollar has been one of the best things to come out of this [Fed] decision. The adjustment today was very helpful,” Bob Mcteer, former Dallas Fed President, told CNBC.
During Wednesday’s press conference, Fed chairwoman Janet Yellen said a stronger dollar was holding down exports and pushing inflation down, indicating the central bank’s concern about the currency.
But Mizuho Bank isn’t concerned: “There is a bit of circularity in the FOMC’s decision to link its economic and rates forecasts to the USD i.e. a much weaker USD will prompt a reversion higher in forecasts again, which in turns support the USD from actually falling too much,” the bank said in a note on Thursday.
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