Dollar weakness ahead? - BBH

Analysts at Brown Brother Harriman explained that the US dollar has fallen against all the major currencies this month.  

Key Quotes:

"Even the pound has gained about 0.3% against the heavy greenback.  

What is most striking about the dollar's decline is that is has taken place despite a modest upgrade of the odds of a Fed hike. Consider on the broadest level, the Dow Jones polls that found 71% expect a rate hike before the end of the year compared with about 50% in the July survey.  

The odds implied by the pricing of the Fed funds futures have also increased.  They increased after the stronger than expected employment report early in the month but fell back off after the disappointing retail sales report and some seemingly dovish comments by a few regional Fed presidents.

However, look at what has happened over the past ten days.  On August 12, the odds that Fed funds target will be 50-75 bp in September, November, and December respectively were 16%, 17.5%, and 36.8%, according to Bloomberg calculations.  Now, after some robust data and seemingly more hawkish comments by Fischer and Dudley (two-thirds of the Fed's Troika, and Yellen speaks at the end of the week at the Jackson Hole confab), those odds have increased to 26%, 30.1%, and 41.9%, respectively.  

There is precedent for the Fed to adjust policy in September of a national election year, but there is no precedent for a November move.  Everyone seems to recognize this.  We think it is a misreading of the odds to suggest that there is a greater chance of a hike in November than September.  This quirk is not the result of thinness of interest in the contract as turnover is second only to the October contract.  Given that the FOMC meeting is late in September (20-21), we suspect that some participants use the October contract to express a view (or take out insurance) for the September meeting."