Dollar traders should bear in mind the "surprises" of the Fed in 2013 and 2015, because if history repeats itself, the current dollar rally could soon fade.
Before the Fed's decision in September 2013, the dollar rose to a three-year high on expectations that it would announce a scaling back of its bond-buying program. But then the Fed unexpectedly did not cut the size, and the dollar erased the gains on the news.
A similar situation happened again in March 2015, when Fed members cut the outlook for interest rates, or bitmap, and the dollar fell.
Goldman Sachs such as Zach PandlStrategists wrote in a report on June 20 that market conditions during the two cases mirrored last week's price movements, that is, the Fed's unexpected hawk position, sending the Bloomberg dollar spot index to its highest level in more than two months.
While there is a general consensus that the recent policy shift is good for the dollar, this is not the case if you draw on the experience of 2013 and 2015. Review the price trends in the above two periods:
Dollar pullback
The Fed unexpectedly failed to cut its size at its September 2013 meeting, and the Bloomberg dollar spot index fell about 3% in the next two months.
After an unexpected adjustment to the bitmap in March 2015, the dollar fell by about 5 per cent over a similar period.
In both periods, the dollar resumed its upward trend after a brief correction.
Valuation
Just as today's hawkish stance mirrors the unexpected dovish positions of 2013 and 2015, today's dollar valuations are in similar contrast to those then. The dollar is 0.8 standard deviations higher than the 10-year average effective interest rate, compared with 0.8 standard deviations lower in 2013.
But looking back at history is a little different: this time central banks around the world no longer follow the same policy trajectory. This means that a continued rise in US interest rates could lead to a sell-off in risky assets, boosting the dollar.