Lessons from past U.S. Fed easing cycles
July 16 (Reuters) -Historical data can be used to try and determine potential future patterns and trends, so the U.S. dollar performance during past Federal Reserve policy easing cycles might offer some clues to its path as we enter another.
Kit Juckes, chief FX strategist at Societe Generale, recently published his analysis on the past seven Fed tightening cycles and six easing cycles since 1984.
The 84-86 easing cycle saw the dollar peak in Feb 85, 175bp into the rate cutting. The 89-94 easing cycle saw the dollar peak a little over a week after the first rate cut. The 94/95 tightening cycle was followed by 3 rate cuts in 95/96 and the dollar kept on climbing until 1998. The dollar recovered before the Fed tightened in 99 and was falling by the time the Fed cut rates in December 2000, but recovered to a new high in 2001, and didn't really trend lower until 2002.
The Fed then hiked rates between 2004 and 2006, before starting the next easing cycle in 2007, by which time the dollar was already in free fall. The final easing cycle (to date) started in July 2019. The dollar fell after the second and third hikes in that series, in late 2019, rallied in early 2020 and spiked when COVID struck, and then fell back after the Fed's introduction of a barrage of measures to prop up the global financial system.
Juckes concludes that the U.S. dollar's two big falls, in 1985-87 and 2001-08 were a lagged response to Fed easing; 2008 was chaotic and the smaller easing cycles are much more mixed in their impact.
If there is a median outcome, it is a lagged reaction to Fed easing, but a very limited easing cycle doesn't necessarily send the dollar significantly lower.
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USD vs Fed funds https://tmsnrt.rs/3zJVErl
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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