In the wake of a strong worldwide currency competition, the US dollar is still holding its own against other currencies on the forex market. The dollar recently made its push against trending currencies the yen and Swiss franc, thus, breaking a nine years interest rate hike. The new development made some traders skeptical and they warned that unseen hurdles could affect the dollar’s future performance.
On Wednesday, the Federal Reserve took the initiative and increased benchmark interest rates up a percentage quarter point. The move sparked the rise of the dollar and as a result, Wall Street shares went soaring, which also generate an upward move in the two-year treasury yield reaching its highest in five years.
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Since its overnight gain, the Japan Nikkei sprang into action by registering a rise as well. The US dollar further went up 0.3 percent to the Yen’s currency 122.59. However, forex traders are unable to decide whether the Japanese currency will start seeing a sharp decline soon.
Koji Fukaya, whom is the FPG Securities president based in Tokyo says, “Any dollar/yen appreciation won’t come at once, it will raise a step at a time”. He went on to add, “The next lift will likely come in the next quarter, when the second hike comes up on the agenda”.
Fed Chairperson Janet Yellen also pitched in by saying that the US will further tighten its monetary policies on a gradual level. This move made market watchers suspect that quarter-point hikes will occur next year based on the overwhelming support Yellen is getting from Fed officials. So far, the median rate projected for 2016 is 1.375 percent.
According to Masafumi Yamamoto whom is Mizuho Securities chief forex strategist residing in Tokyo, “The Fed delivered a message with a hawkish tinge. Despite this, US equities gained and the financial markets were overall calm in their reaction. The fact that risk appetite was retained was key to the dollar’s strength, in addition to the rise in Treasury yields”.
Yamamoto went on to make it known that as risk assets gain, the dollar will receive the support it needs. He further added, “How emerging markets and their currencies fare will be key to gauging risk appetite after the Fed’s hike”.
The dollar will have to overcome traders’ expectations based on any currency movement that is taking place after previous Fed rate hikes occurred.
Heng Koon How a Credit Suisse’s senior strategist said, “Against the key major currencies, we have noticed the previous three Feds tightening episodes resulted in a temporary stall in the dollar rally after the first hike, suggesting a possible temporary decoupling of interest rates and FX”. He further stated, “In addition, the dollar typically encounters some form of profit taking against the major currencies in the initial phases of the Fed hiking cycle”.
So far, the rise of the dollar has been a modest one. It went up against the Swiss franc CHF=, which is considered a safe-haven currency 0.4 percent at 0.9943.
The Euro dollar in the meantime slipped 0.6 percent to fall $1.0851 EUR=.
On the open market, crude oil commodities continued declining and discouraging commodity currencies such as the Canadian and Australian dollars.
The Australian dollar took a dive of 0.7 percent at $0.7182 AUD=D4. Meanwhile, the Canadian currency sold at a rate of C$1.3804 CAD=D4 against the US dollar.
In response to the dollar strengthening and Fed’s hike, the People’s Bank of China went ahead and placed its yuan midpoint at a rate CNY=SAEC, which signals a new four and a half year low.
Lancelot Tucker
