The Federal Reserve Could Raise Interest Rates
The dollar has been rising, and many people wonder how long this could go on. The US dollar index tracks the USD’s strength against six currencies mostly weighted toward the euro. Having touched a 12-year high on Friday, the dollar continues a record setting pace over the past eight months, its fastest rise in 40 years.
Many dollarbugs are claiming that the bull market will continue into the foreseeable future.
There is little resistance on the chart, and so “we have another 10 percent to go,” according to Todd Gordon of TradingAnalysis.com.
The options markets has seen traders bet on further dollar gains and euro losses, including a big trade last week in which someone bought a massive bearish put spread position on the ETF tracking the euro, FXE.
“The price they traded suggests at least a 25 percent probability that we’re at parity by year end here,” said Stacey Gilbert, head of derivatives strategy with Susquehanna, referring to the state in which each euro costs $1. Currently near $1.05, the euro neared $1.40 in April.
According to mainstream reports, the move was made because the Federal Reserve will soon raise short-term rates, making it more attractive to hold dollars, however the European Central Bank has commenced a currency-weakening quantitative easing program.
On Wednesday, the Federal Reserve will announce whether they will be “patient” in its stewardship of its economy. If it does not use that word, than the Fed could raise rates as soon as June.
This week, the key event for currency traders is Wednesday’s Federal Reserve announcement, where the Fed will either include or strike the word “patient” in its guidance. If it does the latter, the central bank would technically be open to raising rates as soon as June.
“I am long-term bullish dollars, but I think the Fed is going to put the brakes on the dollar next week,” said Kathy Lien, managing director of FX Strategy with BK Asset Management. “The speed and velocity of the recent moves brings back the risk of disinflation.”
“While I expect the Fed to drop the word ‘patient’ from the FOMC statement, [Fed Chair Janet] Yellen’s top priority will be to downplay the rush to raise rates—and if she does, it could lead to a 2 to 4 percent correction in the greenback,” Lien said. “I would view that as a great buying opportunity.”
