Fed’s balance sheet expansion is creating a less favorable environment
for the dollar
Analysts at MUFG Bank, argue the Federal Reserve has signaled that it plans to continue expanding its balance sheet at least through the first half of this year, thereby extending less favorable conditions for the US dollar. They point out the options market is expecting more US dollar weakness over the next six months.
“The dollar index has traded below its’ 200-day moving average at around 97.700 for most of this month which is the longest sustained period since early in 2018. A bearish technical development for the US dollar that signals an increasing risk of further weakness ahead.”
“Weakness in the US dollar towards the end of this year has coincided with the renewed expansion of the Fed’s balance and the paring back of pessimism over the outlook for global growth. Total assets on the Fed’s balance sheet climbed to USD4.166 trillion as of the 25th December compared to a low of USD3.760 trillion at the end of August. The fast pace of balance sheet expansion has been running at an annualized rate of around 37%.”
“At the same time the incoming US data flow has not been strong enough to encourage market participants to shift their expectations for the Fed’s next policy move in favour of tightening. The Atlanta Fed is currently estimating GDP growth of just over 2% in Q4. The US rate market is still pricing in a cut later next year. The Fed set a high hurdle for a rate hike when Chair Powell reiterated a significant andpersistent move higher in inflation is required. In contrast, the bar for another rate cut appears lower in light of developments over the last six months. In these circumstances, it is currently difficult to justify an even stronger US dollar.”
Matías Salord in an economist with studies in social communication. He has more than 10 years of experience specializing in financial markets. Matias has been working with FXStreet since 2009 in the news and analysis section.
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