USD performance surrounding Fed hikes has been fairly consistent – Wells Fargo

According to the analysts at Wells Fargo Securities, the U.S. dollar’s performance surrounding the three Fed rate hikes of this tightening cycle has been fairly consistent, with the greenback displaying strength in the weeks and months ahead of those hikes, and softening in the weeks and months after.

Key Quotes

“During these periods following Fed rate hikes, the dollar’s performance against emerging currencies has differed notably from its performance against G10 currencies. Indeed, when comparing the dollar’s performance against emerging currencies, using the Fed’s “Other Important Trading Partners (OITP)” index as a proxy, to the performance of the greenback against G10 currencies, using the Fed’s Major Currency index as a proxy, we see that emerging currencies have actually outperformed relative to their major currency peers in the weeks and months after the two latest rate increases. In contrast, after the December 2015 rate hike, G10 currencies clearly outperformed their emerging counterparts. To offer a precise time frame during which to measure relative currency performance following Fed rate increases, we focus on the three-month period after those hikes.”

“While the U.S. dollar could remain in a period of consolidation in the short term, over the medium term we continue to expect that the greenback will resume its strengthening trend as the Fed continues its cycle of interest rate increases. That said, the extent of those dollar gains and foreign currency losses may differ somewhat for emerging currencies relative to G10 currencies. In particular, emerging currencies may continue to perform relatively better than G10 currencies, such that they could be more resilient and experience milder losses than G10 currencies in the near term. In our view, the relative performance of G10 and emerging currencies as the dollar resumes its strengthening trend will depend largely on the financial market backdrop, a topic to which we now turn.”