Peers have been unwilling or unable to match the full extent of U.S. tightening cycles in the past
The U.S. Federal Reserve looks set to go full throttle again with its interest rate drive, leaving other central banks in a dilemma over whether to follow slavishly or risk another dollar surge.The Fed’s peers have been unwilling or unable to match the full extent of U.S. tightening cycles in the past, and many are once again signaling they will stop short of the Fed this time around too.
Rates traders now reckon a 50 basis point rate hike later this month is three times more likely than a quarter point increase, economists at Goldman Sachs raised their terminal rate forecast to 5.50-5.75%, and analysts at BlackRock said there’s a “reasonable chance” the Fed goes to 6%. “I don’t think other major central banks are going to be able to match what the Fed is going to do. And you will see that in the currency markets,” said Bill Callahan, global strategist at Schroders. “The dollar can stay elevated as long as the Fed remains the most aggressive central bank in the world.”
Other than that, the Fed has always led the way. In some cycles other central banks have not raised rates at all - the BOJ has kept rates near zero for the last 30 years, and the Bundesbank actually went against the Fed in the 1980s and 1990s and cut rates. To quote former Fed chief Alan Greenspan’s famous view on FX rates, the dollar’s direction this year may well be a coin toss, given how much it has already appreciated.
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