Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Fed Interest Rate Tightening Cycles and USD Performance

Interest-Rates / US Interest Rates Sep 09, 2015 - 12:47 PM GMT

By: Ashraf_Laidi

Interest-Rates

Is the peak of the US dollar behind us? Depending on your USD measure of choice, the dollar may have already peaked, when using EUR and JPY, the two largest and most liquid currencies aside from the greenback. If the bulk of the USD bull market starting in summer 2014 was based on heightened expectations of a Fed hike, then would an actual Fed hike signal the peak of the US dollar? Here is our analysis on the response of the US dollar to each of the last three Fed tightening cycles (1994-1995, 1999-2000 and 2004-2006). One common theme was found.


1994-1995 Tightening Cycle

As the Fed began raising rates in February 1994, the US dollar index wasted little time to fall more than 10% in the ensuing six months before stabilizing towards the end of the year and subsequently dropping an additional 7%. Among the main reasons to the USD selloff (despite the easy monetary policy pursued by Germany and Japan) was the resulting bond market crash following Greenspan's tightening, which eroded demand for the US currency. The resulting 10% decline in US equity indices didn't help the greenback either. Despite seven Fed hikes in 1994, the USD lost 5%-15% against all major currencies, with the exception of the CAD, against, which it rallied 6%. In the 1995, USD lost against all major currencies, except for GBP, JPY and AUD.

1999-2000 Tightening Cycle

The 1999-2000 Fed tightening cycle was the most positive for the greenback due to three main reasons: i) interest rates took off from a higher level of 5.00%, compared to 3.00% in 1999 and 1.00% in 2006; ii) the Clinton Administration's "strong USD" policy consisted of rhetoric backed by US-bound global capital flows as the euro crashed during its first two years due to policy errors from the ECB; iii) US-Eurozone interest and yield differentials remained firmly in favour of the US. The "New Economy" espoused by Greenspan's low-inflation-high-growth paradigm made the US stock market the only game in town as US technology stocks served as a magnet for global capital flows and emerging markets (Brazil, Russia and Asia) broke down.

2004-2006 Tightening Cycle

The Fed's 125-bps in rate hikes of 2004 didn't prevent the USD from having one of its worst years in recent history, falling against all ten top-traded currencies. Already in a 2-year bear market, the greenback went from bad to worse due to a swelling trade and budget deficit. A nascent global recovery, led by commodities and their currencies was a major negative for the buck. 2005 proved the only positive exception for the US dollar in the 2 ½ years of Fed tightening due to a temporary US tax law encouraging US multinationals to repatriate profits. But the USD rally fizzled in December 2005 over the ensuing two years, turning into a prolonged USD selloff, courtesy of a secular bull markets in commodities and higher-yielding currencies elsewhere.

Today

The USD appreciation from last summer into early spring 2015 is typical of pre-Fed hike rallies. If the Fed does tightening this autumn, will the greenback's gains could well fade away. Despite notable labour market gains, the inflation requirement remains in doubt. The 20% decline in oil since early May will further delay any recovery in price growth, which has prompted the Fed to drop its phrase in the FOMC statement that "energy prices have stabilized".

China's devaluation is increasingly becoming the biggest barrier to any Fed tighening due to the negative growth impact on the world economy, global price growth and financial markets stability, discussed widely in this website.

It will be difficult for the Fed to raise rates this year if US crude oil remains below $48.00 -- The October-March decline has already triggered a chain reaction of broadening cuts in capital and labour expenditure from big oil and iron ore producers, which effectively cast a spell on the suppliers of these energy and mining companies. And barely when oil began its spring time recovery, the declines emerged anew.

Fed hawks will ignore inflation and focus on unemployment, payrolls and wages. They will add that the non-accelerating inflation rate of unemployment aka equilibrium level of unemployment is at 5.3%-5.5%, matching the current unemployment rate of 5.3%. Fed doves will point to the fact that inflation has remained below its 2.0% target for the last three years, while the true NAIRU stands a lower 5.0%.

Dissecting market and survey-based measures of inflation will become a popular sport in the months to come.

And finally, if the Fed does raise rates, it will most likely be one-&-done rate hike, owing to the deflationary pressures weighing down through commodities. At this juncture, the peak of the USD bull market is already behind us.

For more frequent FX & Commodity calls & analysis, follow me on Twitter Twitter.com/alaidi

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi CEO of Intermarket Strategy and is the author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice.

Copyright © 2015 Ashraf Laidi

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules