The dollar stands at a critical juncture as investors await policy decisions from three of the world’s main central banks this week.
The Federal Reserve delivers its verdict on monetary policy on Wednesday, while the European Central Bank and the Bank of England give their verdicts on Thursday. EDITOR’S CHOICE Blog: Money Supply - Nov-02 Aussie and Kiwi dollars up on growth outlook - Nov-02 Renminbi at heart of trade imbalances - Nov-02 Market Insight: China heads for a Japan-style bubble - Nov-02 IMF refuses to rule out use of capital controls - Nov-02
The decisions come as the rallies in risky assets such as stocks, commodities and higher-yielding currencies look vulnerable. This has stoked haven demand for the dollar, pulling it back from multi-month lows.
Since hitting a 14-month low of $1.5061 against the euro at the start of last week, the dollar has rallied 2 per cent as global stocks have retreated.
Analysts say investors are feeling increasingly uneasy over the sustainability of the global economic recovery as ultra-loose monetary policy accommodation is gradually removed.
“The world is a bit like an alcoholic that’s become too reliant on central bank liquidity,” says Steve Barrow at Standard Bank.
“We might still be many, many months away from the first rate hikes from the likes of the Fed, ECB and the Bank of England, but it seems that the market wants to panic now, rather than wait.”
Some central banks have already moved to withdraw monetary accommodation. Commodity-rich Australia and Norway raised interest rates last month, while India moved to tighten monetary policy by increasing the capital requirements of commercial banks.
But it is the actions of the main central banks, particularly the Fed, that will determine wider trends in the currency market.
Analysts say this week’s Fed meeting is likely to prove key in determining whether the current downward correction in risky assets and the dollar rally extend further.