Dollar Index: GOING BACK AND FORTH

Dollar Index started the year 2014 on a sluggish note and witnessed gains of a mere 2 percent in the first nine months as the US continued with its USD 4.5 trillion bond-buying programme that it started in 2008 to safeguard the world’s largest economy from financial crisis that had created uproar around the globe. However, the US ended the much hyped QE due to the rising strength seen in the economy and concluded the final tranche of its bond-buying programme in October, committing to keep the interest rate near zero for “a considerable time” even after the end of quarter easing. Due to this, there were jitters across the global markets and the DX surged to multi-year highs. As a result of this, DX has jumped by more than 20 per cent in the last six months most likely due to change in stance of the Federal Reserve after the end of QE.

A drop in “patient” stance by the Fed buoyed DX; although a June rate hike seems unlikely. The Federal Reserve was quite hawkish in the September meeting and put an end to the QE although it maintained that the decision of rate hike will not be according to the Fed’s Dot Plot but based on the data releases. However, the meetings that followed were more or less dovish in their tone and the Federal Open Market Committee (FOMC) in their December statement mandated price stability, full employment, and financial stability to consider a rate hike.

In its March 2015 statement, FOMC said it will be appropriate to tighten “when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.” This pulled off DX from its 12-year high levels but dropping of the pledge to be “patient” marked a paradigm shift in the guidance that the Fed has used since late 2008 to keep longer-term borrowing costs low. Moreover, this put the onus completely on the latest economic data and increased the uncertainty regarding future actions of the Federal Reserve. Taking the March FOMC statement and the current scenario into consideration, a June rate hike remains unlikely as the latest data coming out of the US does not give a clear picture of an improving economy.

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Meanwhile, there have been mixed signals from the US’ economy, fuelling uncertainty regarding the future course or trend. The consumer price index registered its first gain in four months and rose by 0.2 per cent in February after declining by 0.7 per cent in January - the most in six years, thereby signaling an improvement in the US’ economy. This is amongst the most keenly watched data as Federal Reserve officials have stated that they needed to be convinced that inflation would eventually accelerate before raising the interest rates.

The non-farm payrolls data for March came in line with sluggish economic data in the first quarter as a strong dollar and weak oil price along with rough winter weather restrained consumer spending. On the other hand, the jobless rate held at 5.5 per cent in March, the same as in February and the lowest in nearly seven years. Owing to this, Fed officials have revised downwards the range of unemployment they view as consistent with a healthy economy to 5.0–5.2 per cent from 5.2–5.5 per cent previously. Coupled with this, another major factor that has boosted DX is the falling global risk appetite hurt by uncertainty over whether Greece and its international creditors will be able to strike a deal that will help Athens secure funding before it runs out of money by April 20.

Greenback’s Way Forward

The DX is likely to remain supported for the coming months as the latest meeting’s minutes revealed that a majority of central bank officials favoured raising rates later this year because of falling oil prices and a strong dollar although they were split over interest rate hike in June. Moreover, Greek officials have acknowledged that its cash reserves are likely to run out by the end of the month, unless it can reach an agreement with its European creditors that would unlock Euro 7.2 billion in bailout funds despite the Greek government honouring its Euro 450 million repayment to the IMF on April 9. This will add on to the risk-off mode in the markets and likely provide support to the DX. Hence, we recommend a ‘buy’ in the Dollar Index at 98.50-98.80 with a stop loss of 96.80 and a target of 101.50-102.50 (CMP: 99.30)

Disclaimer: The above opinion is that of the author and is for reference only.