The US dollar will weaken if the Federal Reserve leaves interest rates unchanged this week, according to TD Securities.
How far the greenback will fall will depend on whether all of the central bank’s decision makers are in agreement with Fed Chairman Kevin Warsh, said strategist Howard Du, who thinks the market is mispricing the risk of rate hikes heading into Wednesday’s policy meeting.
“In the case of a rate hold decision with two or fewer dissents, the dollar should see knee-jerk weakness as the event risk premium fades away,” Du said in an interview Tuesday.
If there is no dissent at the July decision “it would be a surprise for the market and suggests Chair Warsh may have managed to achieve some level of consensus-building, which should lead to a relatively larger knee-jerk dollar selloff,” Du said.
TD expects Bloomberg’s measure of the dollar to fall 0.5% if policymakers are all on the same page. The dollar gauge traded lower along with oil prices Tuesday after US President Donald Trump played down any possible escalation in the Middle East conflict.
Expectations that a Fed led by Warsh would move to increase rates this year has lifted the dollar. That view combined with haven flows buoyed by the conflict in the Middle East has pushed the gauge of the dollar up nearly 3% since the war began at the end of February.
“The current long dollar positioning prices some lingering risk premium of a hawkish Fed outcome for the July meeting,” said Du.
