US Dollar strength likely to extend into 2016

US Fed has raised its interest rates finally after almost a decade in December. Most of the market participants priced in a "dovish hike", which came in as almost priced in.

Fed members economic projections still imply four more hikes next year, well after what market is expecting. For most of them, the rally of 25% in DXY to its December peak is likely to mark the trend exhaustion, on average of previous tightening cycles, this hike marked high for dollar.

But in view of how the dollar trades arround Fed turning points are almost meaningless. Although , USD trended to rise in the first hike and sell off thereafter, the degree of dispersion is huge around the average.

All the Fed tightening cycles are different and how USD trades is dependant on the rates path to anticipations, the path of rates in the rest of the world and the reasons why the central bank is rising, among other things.

"In the current cycle, these factors generally argue for USD strength extending into 2016. We think the forward curve significantly understates the extent to which rates will rise through 2016 and this is against a background where most other central banks are on hold or easing", says RBC Capital markets.