Global traders will be fixated on the FOMC rate decision and the subsequent press briefing from Fed Chairman Jerome Powell. The US Dollar may get a boost if the Chairman’s comments echo a similar line – if not the exact one – of the central bank’s data-dependent approach to policy. At the July FOMC meeting, the Fed cut the benchmark interest rate by 25 basis points. Yet, the US Dollar rose at the expense of equities. Why?

The price action suggests markets were hoping for the Fed to hint or outright say that they are looking into further easing. However, since the market’s expectations were met with comments that carried more prudish undertones, their hopes of looser credit conditions dissolved. This led to a decline in the S&P 500 and capital flowing into the US Dollar as investors switched to prioritizing havens over their pro-risk counterparts.

US economic data has been improving according to the Citi Group Economic Surprise Index, and a temporary truce in the US-China trade war may help boost business confidence and catalyze an upward-push to inflation. Under these conditions, the Fed may be less inclined cut rates further unless prevailing economic conditions warrant accommodative monetary policy.

However, the Fed may also have to consider the impact of its decisions on the world economy and how that may boomerang back to the US. Over 80 percent of all global transactions are conducted in the US Dollar. So, when the Fed raises rates, it is ultimately raising borrowing costs for the global economy, which could lead to weaker demand externally slower cross-border investment and local job creation.

Chart of the Day: US Dollar Continues to Climb as Eroding Fundamentals Place a Premium on Liquidity.

(Click on image to enlarge)

US Dollar chart created using TradingView