Portfolio manager Philip Smith sat down with John Budden ahead of Wednesday's Federal Open Market Committee (FOMC) meeting to share his thoughts on the strengthening US dollar and its impact on financial markets.
Hawkish expectations have caused the US dollar to kite against other currencies
The market has begun to take the Fed's hawkish tone seriously and with a series of aggressive hikes now expected, the dollar has ripped most notably against the Japanese yen (JPY) and the Chinese yuan (CNY).,
As Philip explains in the podcast, a strong dollar is often coincident with tumultuous markets (April was terrible for both equities and fixed income) and can create problems including:
- Crimping growth
- Straining foreigners who rely on a deep US Dollar market for funding
- Forcing the unwind of speculative "carry trades"
- Exacerbating commodity inflation
The market is now whispering of a 75 basis point (0.75%) increase from the Fed, and we are starting to see suggestions that the US economy is moderating. As such, we may be approaching peak dollar bullishness.
The Wednesday Fed meeting will provide clarity on its intentions surrounding rate increases and quantitative tightening. Should the market's fears not be realized, we could enjoy a relief rally. As we've previously discussed, it is our belief that the "Fed put" has been struck much lower, meaning that the Fed will not intervene until equity markets reach a much lower level. As such, any pause would be temporary.
Investors should manage risk accordingly.
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