With the Fed hiking cycle now almost over, everyone in the FX market is trying to figure out when the Fed will change to a rate cut and how the currency will respond. The widely used term “dollar smile” is the go-to for understanding how the dollar reacts to a dovish turn but is it correct?
In a report from Deutsche Bank today, a simple strategy is proposed, focusing on the initial prices and the ‘new news’ to explain the financial smile. The key finding is that U.S. stocks recover from negative shocks faster than global stocks, contributing to the currency’s overperformance in negative images. Scale distribution plays an important role in defining behavior, although other methods also have an effect.
“Over the past forty years, the Fed’s rate hikes have often followed bad news—geopolitical stress, financial turmoil, sovereign debt or financial crises, or trade war-related» trade war – prices are higher in the rest of the world,” Deutsche Bank writes.
Interestingly, the nature of the news after the repricings did not significantly affect the outcome. The result of the sudden trade is the long spread of the front-end between the US and Europe, which can maintain the strength of EUR/USD and GBP/USD, despite the negative trend. international crisis theory. The key factor is whether the ECB and BOE can hold their own in response to a one-time rate hike. the Fed
The Fed
“The Fed” is shorthand for the Federal Reserve or Federal Reserve System, the central bank of the United States. Traders often discuss the Fed’s actions, rather than interest rate decisions, because they have a major impact on all financial markets. The term “the Feds” refers to US Federal law enforcement, including agencies such as the FBI (Federal Bureau of
“The Fed” is shorthand for the Federal Reserve or Federal Reserve System, the central bank of the United States. Traders often discuss the Fed’s actions, rather than interest rate decisions, because they have a major impact on all financial markets. The term “the Feds” refers to US Federal law enforcement, including agencies such as the FBI (Federal Bureau of
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Interestingly, the man behind the ‘dollar smile’ trend – Stephen Jen – has come out with a report today arguing that the US dollar is losing its status as a global currency. .
“The USD is losing its market share as a reserve currency at a much faster rate than expected. Analysts did not see this big change because they calculated the nominal value of the world’s financial institutions regardless of changes in the value of the currency. percent of its market share since 2016 and doubled that amount since 2008.”
The decline in the reserve currency position of the USD has been particularly significant since the start of the war in Ukraine, prompting concerns among reserve countries. However, Jen writes that it is difficult to overcome the strong network effects that support the global financial situation. The decline of the dollar as a global currency affects the stability and growth of financial markets outside the US compared to those within the US and while the that way, the death of money is not an immediate problem.