Impressive comeback of dollar unlikely to sustain

Riding on the optimism of an upcoming rate hike as early as September, after several policymakers in Kansas City organized Jackson Hole Economic Symposium hinted at the ideas of supporting a hike as early as next month; the dollar has made an impressive comeback. Better than expected economic releases have also lent support to that thought.

However, the dollar may not sustain its strength and once more it may become a victim of a relatively dovish Fed, the saying goes, even if the Fed moves in favor of a rate hike in September, though there are doubts that they will. Historically speaking, Fed hasn’t moved with a rate hike in the election year and if that holds this year too, then many of the policymakers waiting for the hike after the election could make some sense. Volatility in the financial markets ahead of November election, may not be a popular idea. But the actual point is that if Fed moves with a rate hike in September without a hawkish up gradation of the entire monetary policy path, especially with regard to longer term rates, then that not likely to be supportive of the dollar.

Current, US monetary policy path is around 200 basis points softer than that was forecasted in December 2014.

As of this week, the dollar is building on its last week’s gains and may move a bit higher if tomorrow’s NFP report comes out great but after that, we are likely to see some moderation heading into FOMC on 21st. The dollar index is currently trading at 96.01, up 0.02 percent for the day.