Wide-Open Fed Chair Race Shakes Up Dollar, Just Not Enough

(Bloomberg) -- It’s the data, stupid.

While investors are fretting over whether the new Federal Reserve chair will be a hawk or a dove, the dollar’s tight trading range indicates that currency traders expect whoever gets the job won’t be able to ignore U.S. economic data in setting policy direction.

The Bloomberg Dollar Spot Index has moved up and down with every headline on the doves versus hawks battle since President Donald Trump said in late September that a decision on the next Fed chair would come within “the next two or three weeks.” It gained 0.4 percent when former Fed governor Kevin Warsh, a perceived hawk, appeared to be the frontrunner, only to ease back after he lost traction. It bounced again on news that Stanford University economist John Taylor, another potentially hawkish candidate, was gaining in favor. Through it all, however, the dollar gauge has been confined in a range of 1.2 percent.

A wide-open race, with each candidate taking a turn as the odds-on favorite, has made the dollar a two-way trade, preventing investors from aligning with a potential frontrunner. Dollar bulls would welcome a hawk in the likes of Warsh or Taylor. Should Fed Governor Jerome Powell, White House economic adviser Gary Cohn or current chair Janet Yellen take the helm, the greenback is expected to come under some pressure.

Yet, such reactions may not last or extend beyond just a knee-jerk move that will be quickly faded by the market. The Bloomberg Dollar Spot Index is trading more than 3 percent off its September lows and above its 2017 bearish trendline. Currently at 1170.48, the index’s first big hurdle on the upside stands 1.6 percent higher at 1188.83, where the 38.2 percent Fibonacci retracement level of the year-to-date drop lies.

To the downside, the 55-day moving average at 1156.22 needs to hold for the U.S. currency to keep its recent bullish momentum alive. Investors might look to fade this 1.2 percent dip to trim their positions or add longs. After all, leveraged investors are short the dollar at levels not seen in almost five years, according to CFTC data.

For the greenback to break out of its recent range, it would take more evidence of a policy shift in either direction. This may put the focus back on the real economy, regardless of who the next Fed chair is.

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Jenny Paris, Boris Korby