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    Fed a toothless tiger? - Commerzbank Ani Salama

    The dollar’s appreciation trend has been broken, with the weak labour market report largely dashing expectations of a Fed rate hike in summer, according to Esther Reichelt, analyst at Commerzbank. Whether the dollar will keep suffering will also depend on whether the market’s long-term view of Fed policy will be reversed.Key QuotesIs it really so important for the dollar whether the Fed will increase its policy rate a few months sooner or later? No, it isn‘t! Instead, the fact that USD exchange rates are so much under the influence of the near-term US monetary outlook is rather due to today’s US monetary policy being so unpredictable.”“This may come as a surprise given that US central bankers are making much effort to invest in improved communication. The regular press conferences, the 'dots' (FOMC projections of its own future monetary policy) etc. are all aimed at making the Fed more predictable. Yet there is one problem: In the past, this communication was often misleading. Looking at the 2016 dots, which FOMC members use to indicate the expected policy rate by the end of the year, one can see that most dots have moved significantly lower over time. The Fed has thus shifted its interest rate hike intentions systematically lower (i.e. not on the back of surprising new information). If one had believed in the FOMC’s projections, one would have permanently made a forecast error – probably looking for a much firmer USD.”“By shifting the next rate move (which the market believes to be a done deal since the release of the latest US labour market report), the Fed now appears to reconfirm that it does roar in fact but that – in reality – it is a toothless tiger unwilling to trigger a tightening cycle.”“Recent weeks’ Fed communication in preparation for a rate hike in June or July has now entirely backfired on currency markets. By preparing the market so clearly for a measure that will not now be implemented will ultimately result in all trust being lost. No matter how long Fed Chair Janet Yellen will reassure at the press conference on Wednesday that moving the rate hike had been ‘data-driven’, she will find it difficult to maintain hopes of a near-term rate move.”“As regards the initial USD weakness following the labour market report this, in turn, implies that there is more to come. If Yellen does not want to make a clear pre-announcement for a rate hike in July (and why should she?), market sentiment may easily revert to its former phlegmatic pattern, thus also ruling out a tightening cycle for the longer term. This would hit the dollar far more than the labour market report itself.”


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