he US Dollar is closing back in on its 2016 highs today amid a continued rise in US Treasury yields. After last week’s FOMC meeting in which a path to three rate hikes in 2017 was outlined, markets may be starting to feel that Fed officials may be a touch dovish themselves.
After all, only “some” of the officials incorporated the expected impact of a fiscal stimulus bump from US President-elect Trump, meaning that some policymakers may not have adjusted their forecasts upwards enough. Furthermore, we didn’t hear from Fed Chair Janet Yellen that the path of rate normalization would be “gradual”; at least she appears to be bracing for the possibility of an economy heating up faster than previously anticipated.
For the US Dollar, the key takeaway, as mentioned first, is the rise in US Treasury yields (more of the ‘Trump reflation trade’ as we’ve called it since right after the election) , particularly in a world where in some places negative rates persist or rates are ‘under control’ in some form. Mainly, this means the Euro and the Japanese Yen.
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