The US dollar is like a rollercoaster these days, going up one minute and down the next. This week, it’s been tumbling down like a wild ride, slipping by about 0.8% to settle just below the 104.00 level on Friday. And, as always, there are some culprits behind this drop in value.
The steep decline in US bond yields has got traders all riled up, as they’ve repriced lower the Federal Reserve’s tightening path. The turmoil in the banking sector doesn’t help matters either, thanks to the collapse of two mid-size US regional banks that have everyone worried about a financial apocalypse.
The Fed Steps In, US Dollar Buckles
In the wake of these worrying events, the Federal Reserve has had to intervene by launching emergency measures to support depository institutions facing liquidity constraints. This, in turn, has shifted bets about the outlook for monetary policy in a dovish direction.
All of this means that the path of least resistance is likely to be lower for the US dollar, provided the current situation doesn’t escalate into a full-blown financial crisis. So, if you’re a forex trader, make sure to keep your seatbelt on tight and brace yourself for some wild rides ahead.
Traders are eagerly waiting for the Fed’s March policy decision, due this Wednesday, to get a better sense of the greenback’s prospects. Market pricing now leans towards a quarter-point interest rate hike, which would take borrowing costs to the highest level since 2007. But, as always, there’s uncertainty ahead, and anything could happen between now and Wednesday.
The Fed’s Guidance to be Dovish
Whatever the Fed decides next week, its guidance will likely be dovish. The FOMC is expected to stress the importance of preserving financial stability and its readiness to act to prevent systemic risks from materializing. This could lead to further US dollar weakness, but it’s all part of the rollercoaster ride that is forex trading. So buckle up and enjoy the ride!
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