The USD turned in a mixed performance last week as the market continues to question whether the Federal Reserve is able to deliver its first interest rate hike by mid-year. Last week it was the strength of the economy and the Fed itself that interjected some uncertainty – U.S. GDP growth slowed to 2.6% in Q4 from 5% in Q3 while the FOMC statement upgraded its economic assessment it also recognized that international developments could affect their policy decisions in the future. The worst performer was the Swiss franc as on signs that the Swiss National Bank (SNB) may have intervened. According to Swiss newspaper, Schweiz am Sonntag, the SNB was operating "a kind of minimum exchange rate against the euro" with a "corridor from 1.05 francs to 1.10 francs". So it would appear that even though the SNB was forced to abandon the cap it hasn’t completely abandoned trying to weaken its currency.
The cavalcade of monetary stimulus resumed last week as more central banks joined the procession. The central banks of Russia and Pakistan both surprised the markets with interest rate cuts. The central bank of Turkey signaled that it may cut rates next week during an emergency meeting while Hungary’s central bank turned dovish. We would like to say the Danish central bank surprised the markets by cutting interest rates to minus 0.5% from minus 0.35% but that would be untrue – the truth is that it is the bank’s third cut in less than two weeks. The Reserve Bank of New Zealand bucked the trend, holding rates steady, though it did warn that it would likely leave rates on hold for longer, which of course means that its next move would be a rate cut.
With countries around the world cutting interest rates and watching their currencies fall against the USD – where does this leave the so called "strong dollar" policy? The truth is a rising USD is no picnic for the U.S. economy as export growth will slow. With the Fed geared up to raise interest rates this trend will most certainly persist, so the question will be how and when will the U.S. government react.
Leave us a comment below, do you think the strong US dollar will continue to rise?
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