The dollar’s rise following an FOMC decision to cut interest rates can be explained by several factors, with market expectations and investor behavior playing key roles. First, if the rate cut was already priced in before the announcement, a “buy the rumor, sell the news” effect may occur, causing the USD to appreciate as investors take profits from prior speculation. Additionally, after a sharp rise in the dollar, some investors may engage in short selling, expecting the dollar to weaken in the long term as the appeal of USD-denominated assets diminishes due to lower interest rates. This could lead to a sequence where large capital flows into the dollar in anticipation of a hawkish statement or surprise before the decision, followed by the selling of these assets and the opening of short positions once the decision is made.
Other factors that could contribute to the dollar’s strength include a hawkish statement from the FOMC suggesting a quick end to the rate-cutting cycle or a positive economic outlook for the U.S., signaling continued strength for the dollar. Moreover, if many investors held short positions on the dollar before the announcement, a sharp price increase could trigger a short squeeze, further driving the dollar’s value up.
In conclusion, the dollar’s post-FOMC movement can be complex, influenced by a combination of fundamental factors, market sentiment, and short-term speculative actions.