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Expensive dollar? - Trump and Yellen are hardly the reason

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This was supposed to be the year of the mighty dollar, with the greenback rising along with the economy and the positive boost from Washington's anticipated pro-growth policies.

But so far, the dollar has been falling, even after it tried to rally back in February. The dollar index is down about 2.1 percent since the start of the year, and 1.4 percent since the Federal Reserve met last week.

"Dollar bulls are stuck in a quagmire," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management.

The biggest factor may be that Fed policy and European Central Bank policy are not diverging as much as traders had expected. That means the difference between U.S. interest rates and European interest rates is narrowing, and since currencies take their cue from rates, the euro stands to gain as the dollar falls.

Federal Reserve officials hiked rates at the March 15 meeting but they held to a forecast for just two more hikes this year, less aggressive than some traders expected.

The dollar index had already lost a half percent in the week running up to the Fed meeting, after the European Central Bank reportedly discussed at its March 9 meeting whether it could raise interest rates before ending its "quantitative easing" bond buying program. That raises the potential that the ECB, which has been easing policy, may ultimately move alongside the U.S. Federal Reserve to raise rates, putting the euro more in competition with the dollar.

"I think it's [the dollar] actually pretty well tracking interest rate differentials. Not only have U.S. rates come off a little, but euro zone rates surprisingly picked up, and I think that's what's driving that narrowing differential," said Robert Sinche, chief global foreign exchange strategist at Amherst Pierpont.

CNBC


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