Dubai: All eyes will turn to the US Federal Reserve this week, amid expectations the central bank will hike interest rates, a move that is likely to create slight volatility in US stocks and the dollar.
Analysts said, while a hike by 25 basis points is already priced into financial markets, the tone of the Federal Reserve — whether that is dovish or hawkish — could spur strong moves in both stocks and currencies, specifically the dollar.
Charles-Henry Monchau, managing director and chief investment officer of Al Mal Capital in Dubai, said that he didn’t expect the Fed to be hawkish as they might want to see more evidence of strong economic growth before adopting such a tone.
“The data is solid but they’ll want to be cautious because there’s a trade war … There’s also the midterm elections coming up, so in addition to rate hikes, they probably don’t want to be too hawkish,” he said.
For the US dollar, that will likely keep the currency little changed on the expected hike.
The dollar index (the DXY), which measures the strength of the currency, fell 2.9 per cent between mid-August and last week, touching a low of 93.9 on September 20, which was the first time it closed below 94 since July. This followed a rally in the dollar that has seen the currency strengthen since April.
“The exact catalyst behind why the dollar is weakening is not easy to point out, but the main contender is that fading fears over trade tensions are providing traders with a reason to take profit on dollar positions that have been building for months,” said Jameel Ahmad, global head of currency strategy and market research at FXTM.
Away from the US, India’s markets could continue to see headwinds due to a dollar shortage in the country as its currency remains near record lows.
On Friday, India’s benchmark S&P BSE Sensex dropped as much as three per cent, driven by a plunge in the shares of Yes Bank and Dewan Housing Finance, which ended 29 per cent and 42.6 per cent lower respectively.
The declines followed a strong rally on India’s stocks that led to what Goldman Sachs described as elevated valuations. A September 16 report by Goldman Sachs called time on the rally due to factors that include high valuations.
Aneesh Srivastava of IDBI Federal Life Insurance Co. said a “bearish phase in the market is beginning,” Bloomberg reported.