Fundamental Forecast for Dollar: Neutral

The US Dollar has struggled for trend recently; and given the fundamental and market conditions backdrop, that is unlikely to improve in the coming week. For the Greenback’s own landscape, rate speculation has been materially crippled by the combination of the FOMC’s downgrade to its rate forecasts and Chairwoman Janet Yellen’s cautious tone on her outlook these past weeks. This will not prevent scheduled event risk from arising in the market, but it will lower its capability for generating a Dollar response. Meanwhile, broader volatility measures have significantly deflated from their remarkable levels at the beginning of the year. That temper speculators’ activities and certainly make the currency’s return to its haven status that much more difficult to inspire.

Monetary policy has both represented to the Dollar’s most prominent catalyst these past years and also its biggest disappointment in recently. When the cloud of accommodative monetary policy finally lifted and the market started to speculate on the eventual first rate hike from the Federal Reserve, the currency responded with an impressive climb. Not only did this set the stage for forecasts of higher returns on US assets, it was perceived as a signal of confidence that the US economy was on a materially stronger footing than its global counterparts. The realization of this slow move back into normalization, however, has not lived up to the hype.

In contrast to the first hike from the FOMC in December, forecasts for the pace of successive moves has quickly faded. Industrious fundamentalists have recognized the shift and what it means for the Dollar’s lift. However, it is important not to carry the correlation too far. A hawkish deviation carried substantial weight in a world still pursuing further easing measures – and hence the Dollar’s gains. Yet, eating away those premiums doesn’t present that same step-for-step response from the currency. While the fundamental buoyancy is certainly deflating, it doesn’t reverse the standings of a ‘hawkish’ Dollar to a ‘dovish’ Euro, Yuan,Yen, etc.