Is it possible to be bullish on the dollar without being hawkish on the US rates?

Is it possible to be bullish on the dollar without being hawkish on the US rates?

When the Fed started to discuss the possibility of raising interest rates back in early 2015, the dollar rallied aggressively against all its major counterparts. On a trade weighted basis, the greenback rose 25% between July 2014 and March 2015 in anticipation of a tightening cycle that would lead to the Fed ‘normalizing’ monetary policy [whatever that now means!].  


A look at the chart below shows that the first rate hike wasn’t until December 2015, so it’s fair to say that the rally in the dollar was either all in anticipation of higher rates, or attributable to something else altogether. While we often favour a contrarian view, regular readers will remember that we bought into the former (as did seemingly every other commentator) and everyone accepted that the strength of the dollar was a result of expectations of higher rates.  


CHART: Dollar Index (Red) vs Fed Funds Target (Upper bound)    big picture 17.08.21

Source: Bloomberg


The same philosophy is now evident elsewhere, too. The euro, sterling and Canadian dollar have all advanced in recent months as their respective central banks have talked-up the prospect of tighter monetary policy (although as yet, it is only the Bank of Canada who have actually raised rates).  


Central Bank 

Chance of a 25bps hike before the end of 2017

Federal Reserve (Fed)


Bank of England (BoE)


European Central Bank (ECB)


Bank of Canada (BoC)



Looking forward, the futures market suggests the Fed is still more likely to raise rates before year end than both the BoE and the ECB, and yet the dollar continues to underperform both the pound and [even more so] the euro. Clearly there are other influences beyond interest rate expectations that impact currencies which shouldn’t be ignored – politics being an obvious one – but history tells us that rate expectations are likely to be the dominant theme, particularly in the short term.  


So back to the original question: Is it possible to be bullish on the dollar without being hawkish on US rates?

In short, we think yes for three reasons:






For the time being, our FX forecasts remain unchanged, but with EUR/USD having all but reached our 1.20 target (and significantly quicker than we initially anticipated), we see a growing risk that the recent trend of USD weakness may be nearing an end. 


Author: Marc Cogliatti



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