Dollar Rally

Some observers are linking the dollar's rally to yesterday's FOMC statement. We do not see much new in the statement. There was a minor modification of its description of growth, but the policy guidance remained the same. Conditions were such that interest rates could remain extraordinarily low for an extended period. One U.S. investment bank suggested that this wording may have brought the first Fed tightening forward by 6 weeks, but it had not looked for a hike at all in 2010. That the economic conditions require exceptionally low rates while the financial markets do not require intensive care is not really new. For several months now the Fed has been indicating that many of the liquidity facilities would be allowed to expire. In fact the June 2010 Fed funds futures finished yesterday implying a 1.5 bp lower average Fed funds rate than was the case on Tuesday (31.5 bp vs 33 bp) and the June 2010 Eurodollar futures contract implied a yield of 63.5 bp at the close yesterday, 3.5 bp lower than the previous day. Further out on the curve there has been some movement of interest rate differentials in the US direction, but we do not think this is the main driver of the dollar's strength.