- Category: US Dollar Exchange Rate
- Published on Tuesday, 31 July 2012 10:53
- Written by Will Peters
"We believe that disappointment is likely on both counts - we think the Fed will choose to wait for more decisive data and expect the ECB measures to be watered down versus market expectations" - Barclays.
The US dollar (Currency:USD) continues to trade in a subdued fashion in London as fixation on tomorrow's FOMC decision increases.
So, will the FOMC act in a decisive, FX moving manner? Consensus on the outcome is certainly hard to come by amongst big-name analysts this morning.
Barclays argue that the USD is likely to be the big winner in the event of a disappointment - which is due from both the ECB and the US Fed.
"We believe that disappointment is likely on both counts - we think the Fed will choose to wait for more decisive data and expect the ECB measures to be watered down versus market expectations - likely boosting market volatility and increasing demand for safer assets such as the USD. The passive rebalancing of FX hedges close to month-end should lead to weak USD selling based on our model," says a morning note from Barclays.
Bank of America Merrill Lynch Global Research are however hinting at a positive surprise. That said, guidance from a FX perspective is relatively unclear:
"In our view, the chances of the Fed undertaking additional easing is rising, as the data weaken, downside risks rise, and uncertainty abounds. The main questions now are not so much if but when the Fed will ease, and what form will it take.
"Probably the most immediate impact in terms of a dovish surprise would be on a lower USD-JPY should short yields fall further, as well as potentially an incrementally higher EUR-USD both on rate spreads as well as the possibility that stimulus in the US could also wind up having a beneficial effect on Europe. On a hawkish surprise, however, commodity currencies such as CAD would be vulnerable."
UBS really confuse matters by saying the US dollar is likely to establish new 'relationships.'
A morning note from the Swiss bank says:
"We now expect the Fed to ‘undertake an easing program within the discount window facility’, ‘hich provides bank with access to even lower cost funding – even at zero – to banks with certain lending or possible debt forgiveness targets’.
"Given the discount window is collateralised, and any programme would be subject to restrictions, the sense of ‘debasement’ is probably less palpable and markets would need to find a new reaction function with respect to the dollar.
"Given investors’ recent tendency to reward policy innovation, we do not expect immediate challenges to the dollar, but are cognisant of the fact that this represents new territory for the dollar itself and the market may take its time to factor in the implications."