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Fed Rate Liftoff and the Forex Market Dilemma

Fed Rate Liftoff and the Forex Market Dilemma

5 Years ago | September 02, 2015 00:00:00

While a Fed interest rate liftoff seems a matter of when, not if this year judging by recent Fedspeak, it poses a dilemma for the forex market. What I mean by this is monetary policy divergence is seen as supportive for the dollar while the recent bout of risk-off led by weaker equities is making it difficult to see this play out as many had forecast.

This is especially true for both the EUR and JPY, two favored funding currencies for carry trades that have been highly correlated to equity moves. One reason is liquidation of long equity positions creates demand for these currencies as carry trades get unwound.

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