US economy strong enough to handle a stronger USD?

The USD rallied broadly following the FOMC statement. Against market expectations, the Fed maintained its outlook for "moderate" growth, focusing on the economy'scumulative improvement since early this year, and removed the risks posed by overseas developments. 

This suggests a much lower bar for hiking than FX markets had anticipated amidst recently slowing data momentum. Clearly the Fed is data dependent, but with the Fed explicitly signalling December is a "live" meeting the USD will be supported not only as the probability of a hike rises, but also if the market prices a faster pace of hikes thereafter. 

Combined with the ECB's strong signal for an expansion and/or extension of QE (and potential depo rate cut) in December last week, rate differentials will once again play be an important FX driver into year-end. 

With the analysis suggesting much of the USD rally since 2014 driven by overseas developments (not the Fed), a significant shift in Fed expectations has room to propel the USD higher, particularly with positioning at its lowest level since the USD rally began. 

"While Fed hikes could take some pressure off of G10 central banks from easing, it also suggest higher beta currencies could struggle if risk sentiment takes a hit or commodity demand comes down amidst USD strength. The key question is if the US economy is strong enough to handle a stronger USD", says Bank of America.