Bank of America: Fears of USD strength

23 December,, London – Fears of USD strength, these are the main concerns of global currency investors, as an increased USD strength throughout 2016 will slow down the Fed’s interest rate hiking cycle, post the Fed 25b rate hike. For the matter, Bank of America Merrill Lynch argues against, estimating that a real trade weighted USD index will increase only modestly by an end of 2016, despite expected sharp Dollar moves versus some currencies.

Ignore fears of USD strength

What does it mean for the Fed? As per the view of the Bank of America Merrill Lynch:

“The Fed is likely to tolerate a modest rise in the real trade-weighted US dollar, which is how the Fed assesses the strength of the US dollar.”

The Fed models imply that a 10% appreciation of the measure, over 2016, would begin to have a measurable impacts upon growth and inflation, lasting for a few years.

The March FOMC meeting will provide additional clues to this case. The broad trade weighted USD index had risen over 10% yoy in real term, as a matter of fact, while the major currency index had increased nearly 20 percent. “Given the size of the forecasted move in the real trade-weighted USD is not all that large by end-2015, we suspect the Fed will be able to look through the increase,” Bank of America noted in its analysis.

Bank of America: Fears of USD strength

From a bigger picture, a very gradual Fed interest rate hiking cycle is unlikely to be as disruptive to the global economy as some of the bearish views suggest, Bank of America argues, adding that the pace of expansion is not likely to be interrupted over the next couple of years. Hence, why the fears of USD strength?

Consider reading: Bank of America: Will USD strengthen?

A rising outlook of global liquidity benefits all economies.

“This is why, for example, the US equity market rallies on dovish ECB news. Thus the overall stance of global monetary policy remains supportive even after Fed liftoff — and despite the onset of the “policy divergence era,” Bank of America Merrill Lynch finished.

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