The US dollar index could fall to as low as 85 as the Fed expands its balance sheet by buying more bond assets, Mohammed Apabhai, head of Asia Pacific trading strategies group at Citi was quoted as saying in a recent CNBC report.
The bank’s latest projection of the dollar index falls into the neighborhood of 85 to the high 80s while 85 is a “historical support level” for the greenback, he was citing as saying in the report.
When the Fed buys more bonds, it pumps cash into the market, according to the report.
This action of the Fed in turn makes bond yields drop as bond prices go up because the yields move inversely to the prices, Apabhai explained in an interview with CNBC.
When the bond yields fall, the dollar usually drops as well, he added.
The Fed also cut interest rates for the third time lately in the year, though signaling a pause ahead.
"That’s because the Fed’s balance sheet has expanded quickly, by more than US$205 billion since the beginning of September,” Apabhai was quoted as saying.
“For us, the fact that the Fed has gone into pause mode is not really as significant as the fact that the balance sheet of the Fed is going to expand. We’re basically looking at substantially weaker levels on the dollar," he added.