US Dollar Undone by Uncertainty

US Dollar Undone by Uncertainty

30 March 2016, 17:38
Vasilii Apostolidi
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Researchers have discovered that people are less stressed by the knowledge that something bad will happen than by the uncertainty of not knowing what is coming.

The study, carried out by a team at University College London, confirms what every investor feels instinctively about financial markets.

If it's obviously going down you can sell it. If it's clearly on the way higher you can go long.

But uncertainty about its direction creates the stress of not knowing what to do.

The analogy is not a perfect one for what was going on at teatime yesterday but there can be no doubt that the stress of uncertainty weighed on the US dollar.

The title of a speech delivered by Janet Yellen, the chairperson of the Federal Reserve, was "The Outlook, Uncertainty, and Monetary Policy".

In essence, her message was that the Fed should "proceed cautiously" in raising rates because of that uncertainty.

It sounded like the third U-turn from the Fed in as many weeks: the first was when, on 16 March, the four increases sketched in for 2016 became two and the second was last week's rash of regional Fed presidents raising the prospect of a rate increase next month.

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April Rate Hike Now Zero?

Ms Yellen's words appeared to indicate that the possibility of an April rate increase is now zero. Subsequent market pricing put the chance of any increase at all this year at no more than two in three.

So the US dollar took another hit.

Having been the back marker on Monday because of concern that the chairperson might play down the rate outlook, the dollar went home with the wooden spoon again yesterday after Ms Yellen did exactly that.

It lost a cent and a half to sterling and one cent to the euro.

Among the other major currencies there was nothing to choose between sterling, the euro, the Swiss franc, the Japanese yen and the Australian and Canadian dollar: all six were just about unchanged against one another.

South Africa's rand took the lead with a 0.7% rally, benefiting firstly from the anticipation, then the reality that caution remains deeply entrenched at the Fed.

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