Fed Tapering May Not Equal Dollar Strength

September 12, 2013

The U.S. dollar could weaken later this month if the Federal Reserve decides to reduce its stimulus by a smaller amount than many investors originally expected, said Sassan Ghahramani of SGH Macro Advisors.

Markets are looking ahead to the Sept. 18 Fed policy meeting to see whether the central bank will start to reduce its bond-buying stimulus program, which has sent cheap cash flooding into the global financial system for four years. Jitters about a potential pullback of Fed stimulus have heavily hit higher-yielding currencies such as the Australian dollar and emerging-market currencies in recent months.

However, the Fed next week may start off with a smaller reduction of $10 billion to $15 billion in its asset purchases, compared with previous market expectations of a $20 billion reduction or more, said Mr. Ghahramani, who is president and chief executive officer of SGH Macro Advisors.

“They’re going to go ahead and get going with it in September, but go with a smaller number and then try to offset it with the promise to keep rates low in the future,” he predicted.

That should help create a relatively “benign” market environment compared to the turmoil seen in emerging-market currencies and fixed income this summer after the Fed signaled possible tapering, he said.

But in that environment, the U.S. dollar may not have as much room to rally strongly and could even weaken some, Mr. Ghahramani said.

Instead, Mr. Ghahramani said he favors the Australian dollar, citing hopes for better government management of Australia’s slowing economy and signs of economic recovery in China.

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