This might be the dollar disaster bears have been waiting for

The greenback bought 112.72 yen – its highest since December 2007 – in Singapore afternoon trade, compared with 112.35 yen in New York late on Friday - Reuters Photo.

NEW YORK: The Federal Reserve’s big surprise could spell disaster for dollar bulls.

The Bloomberg dollar index tumbled 0.5 percent on Wednesday, making it the worst day since January, after Fed policy makers unexpectedly signaled they’d hold their rates benchmark steady all year because of troubling signs from the economy. Among other problems, that could undermine the currency’s appeal by cutting into any yield advantage on dollar-denominated assets.

Investors were caught off guard. Many expected the central bank to slow rate hikes, but no change throughout 2019 was generally not foreseen. The Fed’s shift comes a week after hedge funds and speculators boosted bets that the greenback would outperform peers to the highest level since January.

Before Wednesday, “we were mildly bullish with the intention of flipping as soon as the Fed signaled that it was done tightening through QE and rate hikes,” said Greg Anderson, global head of foreign-exchange strategy at BMO. 

“The Fed dropped those hints a whole lot faster than we thought.”

As 2019 began, dollar bears proclaimed that the Fed would stop or slow interest-rate hikes, U.S. growth rates wouldn’t be able to consistently outperform the rest of the world, and the advantage an investor gets from holding greenbacks would diminish. 

But the currency generally remained buoyant. The Bloomberg dollar index zoomed 7.2 percent higher through Tuesday’s close since sinking to a three-year low in February 2018. Then came Wednesday and the revised dot plot -- the chart Fed policy makers use to convey their rate forecasts.

“The dots are dinging the dollar,” said Mark McCormick, a foreign-exchange strategist at TD Securities. It strengthens the “bearish” case for the greenback, he added.

The Fed’s new stance “partially” vindicates the bears, but for the dollar to weaken more, economies outside the U.S. will need to perk up, according to Bipan Rai of Canadian Imperial Bank of Commerce.

“The key ingredient to ensure that the USD sells off consistently is a pick-up in the fundamental story for the eurozone,” said Rai, the head of North American foreign-exchange strategy at CIBC. 

“We’re seeing some nascent signs there, but we need more evidence -- especially in Germany.” - Bloomberg