The US dollar fell sharply on Wednesday as the markets are now weighing the odds of a rate cut before the end of the year.
This is exactly the sort of trigger I was talking about yesterday when I cited by my bearish fundamental bias for the US dollar, as the previous rally was fueled by expectations of future interest rate increases. However, with the FOMC now signaling no change in rates going forward and possibly considering cutting rates, that impetus has been removed. Indeed, much to the dismay of the Fed, their intervention in AIGfailed to soothe investors’ fears about the health of the markets, as indicated by the 4% or more drops in the DJIA and S&P 500. These moves were led by declines in financials, as shares of the two remaining “big 5” investment banks fell by the most on record. This risk aversion also translated into massive flight-to-safety toward US Treasuries, as yields on 3-month Treasury bills fell to a 54-year low. (Check out our US Trading Summary). Putting the focus back on the Federal Reserve, fed fund futures are fully pricing in a 25bp cut on October 29 and a 34 percent chance of a 50bp cut. Meanwhile, Credit Suisse overnight index swaps are close to pricing in a 25bp cut within the next 12 months, compared to expectations for a 25bp hike just last Friday. Clearly, the markets have taken the Fed’s more neutral stance to heart following the FOMC rate decision and policy statement on Tuesday, and as a result, the US dollar will remain vulnerable to additional decline. Thus, [B]my fundamentals bias for the US dollar remains bearish.[/B]
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[B]Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.
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