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For the past three days, Dollar has gained against its developed as well as emerging market currencies. After US Federal Reserve policymakers in its March meeting reduced rate expectations by 50 basis points to just two hikes, Dollar took a sharp dive down but returning in favor as two hikes were still 25 basis points more than what market was pricing.
Over the past few days, expectations for next hike fast forwarded sharply from November to September and further forward. Market is now just shy of pricing a hike in June.
Let’s review the hike probabilities over next few meetings –
Current FED funds rate stands at 0.25-0.5%
- April, 2016 meeting – Market is attaching 88% probability that rates will remain at 0.25-0.5% and 12% probability that there would be 25 basis points hike.
- June, 2016 meeting – Market is attaching 52% probability that rates will remain at 0.25-0.5%, 43% probability that rates will be at 0.5-0.75% and 5% probability that rates will be at 0.75-1%.
- July, 2016 meeting - Market is attaching 45% probability that rates will remain at 0.25-0.5%, 45% probability that rates will be at 0.5-0.75%, 9% probability that rates will be at 0.75-1% and 1% probability that rates will be at 1-1.25%.
- September, 2016 meeting - Market is attaching 37% probability that rates will remain at 0.25-0.5%, 45% probability that rates will be at 0.5-0.75%, 16% probability that the rates will be at 0.75-1% and only 2% probability that the rates will be at 1-1.25%.
- November, 2016 meeting - Market is pricing 31% probability that rates will remain at 0.25-0.5%, 43% probability that rates will be at 0.5-0.75%, 20% probability that the rates will be at 0.75-1% and only 4% probability that the rates will be at 1-1.25%.
As of now, market is still pricing one hike but that almost in June.
We maintain our view that Dollar will not be able to benefit much even if FED hikes in June as that still would be lower than original expectations back in early 2015. Moreover inflation is likely to return globally, reducing the policy gaps among central banks.
We expect Dollar to weaken in the medium term. However, fast forward expectations likely to exert some support.
Dollar index is currently trading at 95.95, up 0.3% for the day.
