US Dollar Index: Upside potential likely proves modest while the Fed maintains patient guidance – Westpac

Rekindling of a potential Fed taper discussion has thrown the US Dollar Index a lifeline near key support but the inner circle of Powell, Clarida and Brainard remain committed to patience. DXY upside is likely to prove fleeting, according to economists at Westpac.

Any decision on tapering is still many months away

“The Fed’s guidance remains a major constraint that should leave the USD languishing, even if the data cycle turns for the better. Admittedly more Fed officials are warming to a tapering discussion, but Powell, Clarida and Brainard remain committed to patience and any decision is months away. Even then, sustained DXY upside may not develop until tapering is very well advanced.”

“The Fed’s patient approach is likely to become an even more obvious drag on the USD in coming months. The US real policy rate has plunged deep into negative territory, leaving it well below peers. While this is mostly a transitory inflation story and includes base effects, it will be in place for some months to come. USD upside is likely to prove fleeting.”

“DXY is still a sell on strength, looking for fresh 2021 lows on a 3-month horizon.”