SocGen: The historical USD response to Fed easing cycles

SocGen examines historical patterns of the USD’s response to Fed easing cycles, noting that the chances of Fed easing in September have increased. With past easing cycles showing varied impacts on the USD, the overall trend suggests a lagged response rather than an immediate downturn.

Key Points:

• Historical Analysis: Since 1984, there have been 7 Fed tightening cycles and 6 easing cycles. SocGen analyzes the USD’s response during these periods.
• Key Easing Cycles:
  • 1984/86 Easing Cycle: The dollar peaked in February 1985, 175bp into the rate-cutting cycle.
  • 1989-94 Easing Cycle: The dollar peaked shortly after the first rate cut.
  • 1994/95 Tightening Cycle: Followed by rate cuts in 1995/96, the dollar continued to climb until 1998 before falling ahead of Fed easing due to the LTCM collapse.
  • 2000 Easing Cycle: The dollar fell by the time the Fed cut rates in December 2000, recovered to a new high in 2001, but trended lower in 2002.
  • 2004-06 Tightening Cycle: Followed by easing starting in 2007, by which time the dollar was already declining.
  • 2019 Easing Cycle: The dollar fell after the second and third rate cuts in late 2019, rallied in early 2020, spiked during COVID, and fell back after the Fed’s intervention.
• Median Outcome: Historically, the USD tends to experience a lagged reaction to Fed easing. Major falls occurred in 1985-87 and 2001-08, while smaller cycles had mixed impacts.

Conclusion:

SocGen’s analysis indicates that the USD’s response to Fed easing is often delayed rather than immediate. Historical trends show significant falls during extended easing cycles but mixed outcomes during shorter cycles. As the Fed contemplates easing in September, the historical context suggests that any impact on the USD might not be immediate, and the extent of the easing cycle will play a crucial role in determining the USD’s trajectory.

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This article was written by Adam Button at www.forexlive.com.