Weekly: FX – A surprising Fed hurts the USD

by: Georgette Boele , Roy Teo

Weekly-FX-23-September-2013-A-surprising-Fed-hurts-the-USD.pdf ()

Financial markets were rocked by the very dovish Fed. They welcomed the move except the US dollar. The USD fell under heavy pressure across the board including versus the EUR. As due to the drop in US yields, the yield spread between Germany and the US widened, EUR/USD surged to above 1.35. The market reaction highlights that the Fed wants to support growth and liquidity. So the sentiment remained positive. But if financial markets start to take a step back and become concerned about the strength of US economy, the current wave of risk seeking will come to a halt. On the other hand, if US economic data start to surprise on the upside, the market may become concerned that the Fed is behind the curve. All-in-all uncertainty remains in financial markets and this will likely limit the risk-on sentiment experienced in currency markets after the Fed surprising decision. In the near-term, the USD will likely remain under pressure as the Fed is perceived as more dovish than the ECB. This has reduced the likelihood of reaching our year-end forecast of EUR/ USD 1.20, though we believe it is only a delay.