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Dollar Slides before FOMC

Posted by Joseph Trevisani on Sep 19, 2016 3:59:40 PM

The dollar slipped from a seven week high and stocks in New York and around the globe rose as the market odds for a rate hike at the Federal Reserve meeting on Wednesday dropped under 20 percent. 

The Dollar Index (DXY) traded down from Friday's close at 96.108, its best finish since August 9th and the U.S. currency lost ground against the eur, yen and most of its major counterparties.

American equites were modestly higher in mid-afternoon with the Dow Jones Average up 7.60 points at 18,131.40 at 3:52 pm and the S&P 500 ahead by 0.95 points at 2140.11

Major exchanges in London, Paris and Germany in Europe and Tokyo Hong Kong and Shanghai were all higher as markets discounted recent Fed rhetoric from Chair Janet Yellen that the 'case for a rate increased had strengthened'.  

Analysts were split on whether the Bank of Japan, meeting on Wednesday as well, would boost its economic stimulus measures.  The bank is in the midst of an assessment of the effects of its stimulus programs. The ECB is also conducting a review of its policies. West Texas Intermediate retreated below $43.50 from its inter-day high at $44.15. 

Equity volatility has increased over the past two weeks as markets have focused on potential changes in central bank policies that have supported equities, bonds and economies since the financial crisis. The Fed has been the main culprit in this reassessment as it is the only central bank contemplating reversing its monetary accommodation. 

Since increasing the Fed Funds rate 0.25 percent last December, the first rate increase in a decade, and projecting fourth subsequent hikes in 2016, the Fed has been stymied in its intentions by domestic and global developments.

In January and February its prospective rate cycle set off a global equity collapse that only abated as the bank acknowledged the impact of global considerations on its policy. In April and May a sharp drop in payrolls brought on another bout of Fed hesitation.  

Following the August 26th speech by Chair Yellen, which brought the Fed Futures to their highest odds for a September increase since early June, U.S. statistics have faltered.

The ISM manufacturing index sank into contraction in August, and the service sector reading was the weakest since the end of the recession in June 2009.  Retails sales have also disappointed along with average hourly earnings.  

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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