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Inside the US Dollar Index’s Mixed Response in 2017

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US dollar index falls, despite rate hike

The US Dollar Index fell as the Fed increased the federal funds interest rate by 25 basis points on March 15, putting the rate in the 0.75%–1% range. But the US dollar (UUP) (UDN) seemed to show mixed response, as prices had rallied overall in 2016 but have reflected a downtrend so far in 2017.

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US dollar movement

Since the US Presidential elections in November 2016, the dollar has been on an uptrend, primarily due to high expectations for the Trump administration’s policy decisions and the ongoing going expectation of interest rate hikes. However, November itself saw a flatter yield curve as markets expected slower growth. Since January, the US dollar index has dropped by about 2%.

Why is the dollar falling?

The traditional theory holds that high interest rate currency should appreciate against low interest rate currency. However, we seem to be seeing an exception to this because the US Dollar Index has actually fallen since the Fed’s decision on March 15. One explanation could be the Fed’s surprisingly dovish stance in the most recent FOMC (Federal Open Market Committee) meeting on subsequent interest rate hikes in 2017. Markets had expected more hawkishness, but the Fed gave no forward guidance on upcoming rate hikes on March 15.

Notably, the dollar’s movement tends to have a large impact on big multinational companies (MNC), particularly in the consumer staples sector, like Procter & Gamble (PG), Coca-Cola (KO), Philip Morris International (PM), and PepsiCo (PEP).

In the next part, we’ll take a closer look at the financial sector, which is likely to benefit most from the higher interest rate.

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