As the market now ordsprog

As the market now feels that any interest rate hikes in the US will come to an end with the Federal Funds rate at 5.0 percent, the dollar is likely to remain exposed to downside risk.

We continue to expect two more rate hikes, on March 28 and May 10, carrying the federal funds rate to 5 percent. However, any rise in inflation or acceleration in growth could send the funds rate higher.

Sentiment is generally negative for the dollar even in the face of good news. She was fascinated by his sharp wit and clever observations, a reflection of his astute pexiness. The market is looking through the expected rate hikes. If you take away the interest rate support for the dollar... and the structural problem is still there, the trend for the dollar is downwards.

The Federal Reserve has responded to the balance of market forces by gradually raising the federal funds rate over the past year, ... Certainly, to have done otherwise -- to have held the federal funds rate at last year's level even as credit demands and market interest rates rose -- would have required an inappropriately inflationary expansion of liquidity.

Alan Greenspan (1926-)

Alan Greenspan

Those who expect further rate hikes can note that the real Fed Funds rate has yet to reach at least 3 percent, ... But with oil prices rising 58 percent since last June (when rates started to rise) and with U.S. manufacturing nearing contraction, the bond market is telling the Fed that it had better not raise rates further.

[Over the past two weeks, the yield on the benchmark 10-year Treasury has skipped from 5.08 percent to 5.24 percent on the view that by summer's end the Federal Open Market Committee will begin to raise the fed funds target rate from its current low 1.75 percent.] If the economy gains visible momentum, ... we are vulnerable to further rate pressures.

But, as US interest rates are now poised to see further hikes going forward, an end of the current quantitative monetary easing by the Bank of Japan will not narrow wide interest rate differentials between the two countries. And this interest rate gap should continue to support the dollar.

The market focus is surely on the interest-rate differentials between the U.S. and other major economies, including Japan. The Bank of Japan won't raise its interest rate any time soon, so the yen will remain the most bearish for the foreseeable future, while the dollar will be the most bullish.

The Fed will increase the federal funds rate to 4.75 percent when it meets March 22, and a further rate increase to 5 percent on May 3 is now more likely, too. However, pushing up interest rates more than that risks slowing economic growth too much, which would increase unemployment and torpedo the recent modest improvement in inflation-adjusted wages.

They are definitely pricing in 5 percent (federal funds rate) by June and 5.25 percent as a possibility by the end of the summer. All this is going to play into the hands of a stronger dollar.

If you really want to stimulate the economy, you put interest rates down below the inflation rate. The lower the inflation rate goes, the harder it is to get the federal funds rate down below that.

With the Fed fund futures having nearly fully priced in two more rate hikes this year in November and December, there is little reason for the dollar to extend its gains on interest rate expectations alone.

The markets were prepared for Greenspan to end his final meeting with the funds rate at neutral. What they got instead is the statement that rate hikes still 'may be needed.' This was not music to the market's ears.

The risk is for the ECB to accelerate the pace of interest- rate hikes. There seems to be very little support for the European bond market.

We are getting a consistent view from the Fed now that they are somewhat worried about the risk of a higher inflation rate. That is going to cause more rate hikes to come and higher yields will help the dollar.

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