The US dollar came roaring back today, erasing all the losses it had from the very dovish Fed policy meeting. The downgrade of interest rate increase expectations from two to none, combined with a softer economic outlook remains the main catalyst for falling yields on the Treasury curve and higher stock prices. The dollar fell sharply after yesterday’s FOMC decision, but today’s reversal is surprising many. The interest-rate differential argument for today’s rally is a valid one and most likely supporting the dollar here in the short-term.
All of the advance economies respective central banks have no tightening priced in this year, so we could see choppy conditions going forward. Europe remains weak, but we could start to see German manufacturing data and business climate indicators rebound in the coming days. If Europe does start to show signs of stabilizing, that could alleviate the pain of dollar bears.