17 November, AtoZForex.com, London – As the first Fed interest rate hike in over a decade draws near, it is worth looking back in the history of previous tightening instances and investigating the USD’s behavior.
Societe Generale therefore analysed three instances in the past twenty-one years with the respective rate hikes occurring in February 1994, June 1999, and June 2004. In both the 1994 and 2004 occasions, the Fed increased the Funds rate by 125bps in six months, and by 75bps in the 1999.
Societe Generale used the DXY Index as the proxy for the USD. “What is interesting is that the US dollar fell in the six months following the first Fed hike in all three cases,” Societe Generale noted, adding that:
“The dollar climbed in the months heading into the first Fed hike, and fell in the months afterwards. In every case.”
The bias for the USD to retrace in the months after the first Fed rate hike is likely a “buy the rumor, sell the fact” phenomenon due to the forward looking nature of the financial market. In three- and six-month periods prior to the Fed actions the DXY returned an average of +1.5% and +4.4% respectively.
Although it is important to note that the past cannot guarantee what the future might have fore us, it certainly warns that the financial market is highly efficient and very forward looking.
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Therefore, Fed actions will require to be more hawkish than expected in order to drive the USD higher in the months after the widely expected US rate hike in December. Alternatively, “the policies of the main non-dollar central banks, and in the case the ECB and BoJ will need to be easier than expected,” Societe Generale adds. Or a combination of both.
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