The U.S. dollar ticked higher on Tuesday, stabilizing what’s been a rocky ride in December as markets are now factoring in the possibility of a rate pause given Federal Reserve Chairman Jerome Powell’s recent comments alluding to flexibility with interest rate policy.
Powell recently referenced 2016 as a prime example of a year that warranted the Fed to be more adaptable with policy.
“No one knows whether this year will be like 2016,” said Powell. “But what I do know is that we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2 percent.”
A synopsis of 2016 by Barron’s revealed that “After a topsy-turvy 2016—at one point in February, the S&P 500 index fell 15%—investors should be relieved, and even happy, about the index’s nearly 10% rise on the year. A year ago, analysts expected S&P 500 earnings growth of 10%, to $128 a share in 2016. Instead, earnings are likely to come in flat, at $118. The market’s forward price/earnings ratio has expanded, however, from 16 times to 17 times. The dollar rose 4% in 2016.”
Rate Pause Expectations
The U.S. Dollar Index (DXY) has been on an upward trajectory for most of 2019, but after a tumultuous December for equities and a more dovish-sounding Fed following its fourth rate hike of the year, the markets are now looking at a rate pause as a plausible alternative.