USD: Dovish developments? – Rabobank

Jane Foley, senior FX strategist at Rabobank, points out that the USD is the worst performing G10 currency over the past 24 hours on the back of a more dovish than expected policy message from the Federal Reserve last night.

Key Quotes

“While a dovish central bank is a currency negative factor, the outlook for the USD crosses must also be seen in the context of the fundamental backdrop for other currencies.”

“The anticipation that policy will be more accommodative than expected going forward has eased fears about declining USD liquidity and lifted risk appetite across the board.  However, parts of Powell’s message were far less market friendly.”

“Powell cited his concerns regarding the risks of a sharp US economic slowdown due to cooling growth in Europe and Asia. He also confirmed that officials were paying close attention to policy-related headwinds from trade disputes and suggests that “these risks are going to be with us for a while”.  These remarks do not describe a backdrop which is conducive to supporting risky assets.  In view of this backdrop we expect that the USD will perform well vs. many Emerging Market currencies this year.”

“Although the Fed’s more dovish tone will limit upside potential for the USD vs. EUR in the coming months, we continue to expect choppy conditions for EUR/USD close to recent ranges as the market reacts to incoming data from both the US and the Eurozone.”