The Federal Reserve's cautious shift may not be enough to sink the dollar. The dollar dipped after the Fed’s policy statement but regained ground Thursday, defying some analysts’ expectations that low interest rates tend to make the currency less attractive for yield-seeking investors. The WSJ Dollar Index rebounded 0.3% to 89.46 Thursday, after declining on the day of the Fed’s announcement. It was up again in early Friday trading. Some traders said the currency is likely to remain around current levels because weak growth in virtually every major economy has put many of the world's major central banks on a similar policy trajectory. A strong currency makes U.S. products less competitive abroad and eats into the profits of multinationals when they convert foreign earnings into dollars. Globally, a strong dollar tends to pressure prices for commodities, which are denominated in the U.S. currency and become more expensive to foreign buyers when the dollar appreciates. The European Central Bank said earlier this month it planned fresh stimulus measures to kick-start the eurozone’s lackluster economy less than three months after phasing out a €2.6 trillion ($2.9 trillion) bond-buying program. China's central bank is deploying a fresh round of stimulus, and the Bank of Japan has left its ultra-easy monetary policies in place. The turnaround leaves intact a gap between benchmark bond yields in the U.S., where the Fed started raising rates years ago, and those of major economies like Europe and Japan, which have not had a chance to reverse years of stimulus. A dovish Federal Reserve may prove more of a boon for emerging-market investors, especially those engaged in the carry trade, a strategy in which investors seek to bolster returns by buying high yielding—and often comparatively risky—emerging-market currencies. As a result, lower yields in the U.S. tend to boost the attractiveness of emerging-market currencies while also keeping pressure off of countries that need to service their dollar-denominated debt. Currencies such as the Mexican peso, Russian ruble and Egyptian pound stand near their highest levels in months, although many fell against the dollar Thursday. Are you bullish or bearish on the dollar? Let the author know your thoughts at ira.iosebashvili@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |