Analysis from Bank of America Merrill Lynch
"We argue that only a small part of the strong dollar rally since last year can be explained by approaching Fed hikes. Although broad trade-weighted USD index has appreciated by about 14% from a year ago, only 3% of this can be attributed to changing perception about the Fed policy according to our quantitative analysis (The Chart of the Day).
As a result:
- The dollar has more room to strengthen when the Fed actually initiates hikes, in our view, especially given that the Fed policy will be diverging from that of most other global central banks with a September hike not fully priced into the OIS curve.
- In turn, further dollar appreciation might translate into further downward pressure on key commodity prices such as oil.
- Although our analysis supports the Fed's view that the price of the dollar largely reflects the relative strength of the US economy, stronger dollar might prompt the Fed to communicate a slower pace of hikes if it sees a spillover into the data."
For trade ideas from banks, check out eFX Plus.
