DXY dropping in wake of skepticism for Fed dot plot, eyes on 99.85
DXY is back to trade below the 102 handle testing the previous resistance of November and December and investors begin to back track and pull out of their long positions after the FOMC failed to convince markets of their proposals for three rate hikes in 2017.
Analysts at Bank of Tokyo Mitsubishi explained the US dollar had continued to weaken first in the Asian trading session following the release overnight of the latest FOMC minutes from their meeting on the 14th December. "The FOMC minutes have triggered a temporary correction lower for the US dollar which in part backs up our view that recent strength appears to have been running a little ahead of the improvement in key short-term fundamental drivers. US yields have recently stabilized at higher levels creating a less supportive environment for further US dollar upside in the near-term which will likely require a fresh catalyst."
However, the overall picture remains bullish for the dollar as it appears to be the only section of the market that is proposing to provide yield for investors and analysts at Brown Brothers Harriman explained that their broad outlook for the dollar remains intact.
"It is predicated on the divergence of monetary policy and interest rates. The traditional knock on the US, that having the dollar as the major reserve currency gives it an exorbitant privilege of lower interest rates, misses this key driver. The US premium over Germany, the UK, and Japan are at multi-year extremes. This creates an incentive structure that encourages investment flows into the US and hedging non-dollar exposure."
Meanwhile, the DXY has been in free-fall as the week heads to a close with the nonfarm payrolls as the showdown tomorrow. Today's ADP report was a miss and speculation is that official government data tomorrow may not stack up to the Fed's preferred levels of improvement, again a possible deterrent for investment into the greenback. 99.00 is the next key target on a break below 99.85.