Why June hike and twice this year not enough to strengthen Dollar?

To answer the above question, we need to trace back Dollar’s rise, which actually began back in 2011, at the eve of European debt crisis but that was way far from being broad based. Next adjustments leg came in 2013, with emerging market currency crisis but the actual broad based leg came in summer of 2014. During this period Dollar index rose from 80 in July, 2014 to around 100 in March, 2015.

And if you ask anyone, the answer you will get that interest rate expectations (similar to monetary policy divergence & etc.) to be behind the move.

So, let’s check the projections back then, what FOMC participants were forecasting

In September 2014, FOMC participants were forecasting interest rates to be

• 1.25% in 2015 and 2.75% in 2016

But look at reality, FED rate was 0.375% in 2015 and even with two rate hikes this year, it will be at 0.875%, which is far lower than the projections.

Dollar should have weakened after reaching around 100 in March. What kept Dollar supported is policy divergence. Further easing by prominent central banks namely ECB and BOJ.

But their recent actions suggest that side of the divergence is coming to an end, which is leaving Dollar not much to chew on.

Hence we are maintaining our forecast for Dollar weakness. However, we believe Dollar bull trend isn’t over yet but will lose ground in the near to medium term.