The dollar fell on Monday, two days before a major monetary policy decision by the Fed, which will unveil on Wednesday about the monetary policy of the US central bank for 2019. The dollar index weakened in the anticipation of a pause in the Fed’s key interest rate hike. The greenback fell by 0.4% to 97.07 points. For its part, the euro regained 0.45% to $1.1357, while the pound rose 0.29% to $1.2620.
The Fed will meet on Tuesday and Wednesday, and markets expect a rate hike by a quarter point, which would bring the Fed interest rate between 2.25% and 2.50%. However, for 2019, investors expect only one increase (against three expected until recently), given the signs of a slowdown in the global and US economies.
Some analysts even believe that the Fed could reduce or even end the shrinking process of its balance sheet started in October 2017. Since then, the Fed withdraws $50 billion per month of government bonds market, letting them arrive maturity without repurchasing an equivalent amount of securities. This reduction in the Fed’s balance sheet has a limited impact on the bond market.
The Fed’s new economic projections will therefore be pegged in terms of rates, inflation and economic growth for the coming years. Investors are also eager to hear Fed chief Jerome Powell, who will hold a press conference Wednesday night. Note that Monday, Donald Trump has once again tried to discourage the Fed to raise rates, calling it “incredible” and surprised to see it is considering a further rise in rates.
Last week, the greenback index rose about 0.5% in five sessions, benefiting from a safe haven effect as equity markets moved into a new turmoil zone. Many traders pointed out that this development was not making sense, given the more moderate stance adopted by the Fed for more than two weeks. The expectation for a pause in the rate hike makes it likely that dollar investments will become less attractive.