In the fast-moving lane of foreign exchange trading, one item has been at the forefront: that the interest rate policies of central banks would be the primary driver of currency movements.
Foreign exchange investors have had one organizing principle. That was the Fed’s tightening bias contrasted with the easing bias of the Bank of Japan and the European Central Bank.
After the rate hike by the Fed, the consensus from some analysts (mainly in Europe) is for the dollar to weaken against the euro and the yen. On a trade-weighted basis, Credit Suisse expects the dollar to decline 1 percent in the next three months.
Monetary easing announcements have successfully pushed down interest rates in Japan and Europe, they have failed to weaken currencies significantly. The Fed will most likely announce a rate increase next month.
In my previous post, I mentioned a rate increase in the U.S.means lower Asian stocks and a stronger dollar. With the dollar losing ground so far this year, it has room to grow.
So, what’s going to happen with the dollar? We’ll see.