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What Next for the Dollar?

The Fed’s decision to raise rates by 25bp last week was not a surprise; expectations for a hike increased to 94% in the week or two prior to the decision (as we referenced in the Big Picture published on 6th March). USD strengthened by almost 3% relative to GBP and CAD respectively in the 2-3 weeks leading up the announcements as the Fed robustly managed expectations as to what was coming.


Upon release of the announcement some of this gain was given back immediately in a classic example of “buy on the rumour, sell on the fact”. USD immediately fell by more than 1% relative to EUR and CAD respectively and has continued to soften against GBP. This reaction is consistent with a market that fully ‘priced-in’ the headline event. As participants look at what is coming next the associated commentary around the decision was not enough to drive the market...

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Are the high costs of hedging for euro investors coming to a turning point?

As far as hedging decisions are concerned, the last few months haven’t been particularly easy for euro investors. Implied hedging costs for a currency are defined (partially or totally, depending on the instrument and market conditions) by the carry, (the differential between the base currency’s and the investment currency’s interest rate levels). The fact that interest rates in the Eurozone have been below zero since 2014 and decreasing ever since has created a big interest rate differential against many other countries, which explains the rising costs for the euro investor to hedge other currencies.




The one currency pair that has received a lot of attention recently is EURUSD. Costs of hedging USD for the EUR investors using FX forwards is currently 2% per annum. Very different reality if compared with early 2014, when the cost was virtually zero, or 2008, when instead of incurring a cost the euro investor would get...

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Does a flattening yield curve signal pain for the dollar?

The latest news from the FOMC indicates a March hike of the Fed’s policy rate would “likely be appropriate” so long as “…employment and inflation are continuing to evolve in line with [their] expectations”. This news has increased the market implied probability of such a hike a further 5% to 94%, continuing the ramp up from just under 40% a little over a week ago.




As expectations for short term interest rates continue to rise, we are beginning to once again observe a flattening of the US yield curve (short term rates rising disproportionately more than long term rates). This flattening can be illustrated by overlaying the current yield curve with curves from 1, 2, and 3 years ago, as shown below.




Stepping back to look at the bigger picture, many ask what does a flattening yield curve mean for investors, and more specifically, might such a flattening mark the end of...

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