RISK is back on as the US dollar index trails off after hitting a peak of 80.706 on Tuesday. There were market talks that the Fed has adjusted its forward guidance rate for unemployment to 6.5% as a new benchmark before it considers adjusting interest rates.
The news stems from research papers by Fed economists and until evidence of Fed tapering balances monetary policy, the US dollar weakness will likely be maintained. The main headline take-away was that under a fully credible Fed that can tie its own hands even as inflation overshoots, the “optimal” fund path has rates lift-off into possibly late 2016. “Lower for longer” now implies higher later, or in other words “guidance” is more about the slope of near-term US rates path rather than the medium-term outlook for yields.
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