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Dollar Staves Off Correction as Fed Looks to Lose Hawks

John Kicklighter

DailyFX.com -

Talking Points:

  • Dollar Staves Off Correction as Fed Looks to Lose Hawks

  • Euro Reacts to Data but Bigger Troubles Lie Ahead

  • Japanese Yen: Prime Minister Abe Says Keeping an Eye on ‘Weak’ Currency

Dollar Staves Off Correction as Fed Looks to Lose Hawks

Interest rate forecasts and a need for safety – that is what the Dollar feeds off of. Market developments this past session hit on both themes, but the currency wasn’t struck with a meaningful wave of conviction. That is because both channels of fundamental drive – though ultimately supportive of the greenback – were partially blocked by offsetting stipulations. Starting with the most omnipresent and imposing matter, the S&P 500 posted its third consecutive decline to put the benchmark in its deepest correction since the beginning of August. Offering the scope that upgrades this move from detached misstep to a more systemic concern on risk, equities were lower on a global basis and the VIX Volatility Index soared further to 15 – the highest level in six weeks. And yet, fear stopped short of infecting the FX markets.

Looking at the currency market’s own volatility measures, the one-month equivalent to the VIX was little changed on the day (at 7.55) while the short-term one-week slowly tries to reclaim ground lost after last week’s incredible drive (at 7.52). The FX market is certainly sensitive to genuine shifts in financial sentiment, but central banks’ influence on the system smothers all but committed repositioning. And, the Dollar is a unique brand of haven that requires an absolute demand for liquidity – not just a mild swoon in risky positions. That said, both market participants and officials continue to point out the unsteady footing we are trying to maintain. Adding to concerns voiced by Fed officials, other central bankers, the BIS, OECD and IMF; Carolyn Wilkins of the global Financial Stability Board noted concerns with the heavy investment in ETFs and liquidity problems that could arise should the market come under a significant selling pressure.

It is important to keep a constant vigilance moving forward, but the focus will likely keep to the greenback’s more active avenue of fundamental motivation: rate speculation. The docket was packed with Fed speakers this past session, and the ranks maintained their well-known biases. Narayana Kocherlakota reiterated his dovish view with a warning that inflation could be below target for four years, Esther George commented that rates should have already been hiked by now, James Bullard said he expected a 1Q 2015 rate hike and Jerome Powell again refused to give a bias. Today, Charles Evans and Loretta Mester will offer new voices. A consideration for medium-term rate forecasting, the NY Times ran an article about the upcoming retirement of Fisher and Plosser – two well known hawks that don’t vote in 2015.

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