On Sunday evening, the US Federal Reserve reduced the federal funds rate by 100 bps, bringing its base rate to between 0.0% and 0.25%. The Fed also announced a reduction in the cost of its USD swap facility with five other major central banks, in order to ease USD funding concerns. The 100 bps cut was the Fed’s second emergency rate cut in as many weeks. However, the dollar appreciated significantly following the Fed’s latest policy move, reflecting ongoing funding concerns in both developed and emerging markets. Measures of USD demand are best captured by the EUR/USD cross-currency basis, which widened considerably in recent sessions.
In this podcast we explain the dynamics behind the recent bout of dollar appreciation as well as what measures the Fed needs to take to calm markets and weaken the currency. In the short term, we continue to believe that safe-haven currencies like the Japanese yen and the Swiss franc offer a compelling risk/reward profile. Although gold prices have not performed as well as we expected, they remain a valuable part of any investment portfolio in the current environment.
Global Head of Forex Strategy