Fundamental Forecast for Dollar: Bearish

The Dollar has taken a nasty spill, but how do we reconcile the recent decline against years of rally and the proximity of a near-decade high? In the past three weeks, USDollar has dropped as much as three person – the most aggressive slide from the world’s most liquid currency since June of 2013. The past week’s tumble was especially pronounced given its fundamental leverage. Another significant downgrade in the Fed’s rate forecasts gave weight to speculative skeptics and traction in selling pressure to the tune of the sharpest two-day loss in over two years. Yet, is this the inception of a prolific bear trend or the limited evaporation of bullish excess? The influence of the market’s two most prominent themes (risk trends and relative monetary policy) and cross currency influence will decide.

There is little denying the momentum in recent selling pressure – following 10-months of flagging bullish conviction. And, recent fundamental developments seem to lend significance to the price move. This past week, the Federal Reserve held its benchmark range of 0.25 to 0.50 percent and pressed its concern over global stability. The reference is significant as it insinuates there are further hurdles to further hikes beyond the dual mandate of maximizing employment and stable inflation. The FOMC’s updated forecasts made that reticence certain. The already dubious projection for 100 basis points (bps) of hikes in 2016 – equivalent to four standard quarter percentage point increases – was downgraded to 50 bps of tightening through year’s end.