Even after Yellen’s dovish statement and the downward adjustment in the expected ‘appropriate’ interest rate levels visualized by the FOMC ‘dot plot’, the Federal Reserve is the only major central bank that has a real ambition to raise rates. The markets now understand this, as earlier recession fears were (massively) overdone. More on the likelihood of a U.S. recession can be found in this earlier post.
For some investors, the ‘renewed’ belief that the Fed target rate will gradually go up from here is reason to expect that the U.S. Dollar will also start to appreciate again. But a glance at history suggests this is not likely to happen. Just take a look at the table below, which shows the changes in the trade weighted U.S. dollar (last column) during rate-hike cycles. As the table reveals, only in three out of the eight hiking-cycles since 1972, did the trade weighted dollar go up. Equally important, on average the U.S. dollar depreciated during those eight hiking cycles. Hence, when betting on a stronger U.S. Dollar, especially if that bet is based on the Fed hiking-cycle, remember that the odds are against you.
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