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Investors Ditch US Dollar Ahead of Fed Meeting; GBP/USD at 15-Week High

The US dollar recorded its largest one-day fall in nearly 3 months on Friday as the attention of traders turned back towards an increasingly cautious Federal Reserve.

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The US dollar Index shed 0.76 points on Friday and, in doing so, managed to take back half of the dollar’s gains since January-10.

In the absence of an obvious catalyst, foreign exchange traders attributed heavy dollar selling to investor repositioning ahead of next Wednesday’s Federal Reserve meeting.

The Australian dollar ended the week buying $0.7179, the euro bought $1.1405 and the British pound settled at a 15-week closing high of $1.3197.

AUD to USD - 3 month chart - Latest
AUD/USD - 3 month Chart - Latest

Although outright dovishness at the Fed meeting is highly unlikely, it may be that policymakers emphasize further caution following an extended shutdown of the US government, which will do no favours for first-quarter economic growth.

In December, after lifting the fed funds rate into the 2.25-2.5 percent range, the Fed signalled that only two increases to the rate should be expected in 2019, down from a projected 3 increases in September. Fed Chairman Jerome Powell acknowledged at the time the emergence of what he called “cross-currents”— economic risks originating from outside the US, including Brexit and a Chinese economic slowdown.

Longer-term implications of January’s shutdown are also dollar-negative given a perception among investors that US economic acceleration has been, for the most part, the result of Donald Trump’s fiscal spending, rather than being the result of tax cut-driven increases in consumer or business spending. With that said, the inability of Congress to agree on fiscal policy suggests to many analysts that an economic slowdown is ahead.

“A slowdown in the US economy . . . is likely to weigh on the US dollar particularly in the second half of this year,” CIBC’s FX research team wrote on Friday.

GBP to USD - 3 month chart - Latest
GBP/USD - 3 month Chart - Latest

Of the same opinion is an expert at ING, Petr Krpata, who argued earlier in January that the US dollar’s bull run is nearing its end. The dollar is soon to “embark on a gradual long-term bearish trend,” Krpata said.

Despite some stalling of late, the greenback is worth nearly 8 percent more than it was a year ago, as measured by the US Dollar Index—it’s worth as much as 13 percent more against the Australian dollar.

Though the government shutdown came to an end on Friday, this is a subject likely to be revisited in 3 weeks’ time. In his Rose Garden address, Trump hinted that if border wall funding wasn’t agreed by February-15, he would declare a state of national emergency at the border—a declaration that would allow emergency funds to be released, though action to this effect would risk legal challenges.

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