Hawkish vs Dovish: Monetary Policy Effects on Forex Traders

A hawkish approach means wanting higher interest rates to control inflation. This term pops up a lot when banks like the Federal Reserve plan to slow down inflation, even if it means the economy grows more slowly. Now let’s take a look at some principles to keep in mind when rates are rising or are about to rise. Remember, rising interest rates mean that inflation is likely or expected to increase in the short term.

That growth in demand for stability can add share price growth which can combine with the value provided by the dividends themselves for a profitable investment. We have been in a low-interest environment ever since December 2008, when the Fed sent rates down toward 0% to combat the 2008 recession. Janet Yellen, Fed chief from 2014 to 2018, was generally seen as a dove who was committed to maintaining low lending rates. Jerome Powell, named to the post in 2018, was rated as neutral (neither hawkish nor dovish) by the Bloomberg Intelligence Fed Spectrometer. The central bank interest rate determines the rate at which other banks like Chase can borrow hawkish meaning in forex from the Federal Reserve.

What do hawkish and dovish mean in forex?

1. Central banks play a big role in setting the direction for financial markets.
2. Hawkish policymakers prioritize containing inflation and maintaining price stability, often through tightening monetary measures like interest rate hikes.
3. This article looked into the definition, traits, and effects of hawkish policies in finance.
4. The opposite of hawkishness is dovishness, which is characterized by a central bank that is more focused on promoting economic growth than on controlling inflation.

You’ll find many a banker “on the fence”, exhibiting both hawkish and dovish tendencies. However, true colors tend to shine when extreme market conditions occur. It’s that individual’s role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Jeff Bezos or Warren Buffett steps to the microphone, everyone listens. But the Fed assumed a polar opposite stance during the first wave of COVID in March 2020, slashing the benchmark interest rates to near zero and launching a sizable bond buyback program.

1. The FOMC also consists of five presidents of the 12 Regional Federal Reserve banks.
2. This interest rate is the rate at which other banks in a country can borrow money from the country’s central bank.
3. The central bank may also reduce the money supply by selling government securities, which reduces the amount of money available in the economy, thereby reducing inflationary pressures.
4. Central bankers are described as “hawkish” when they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment.
5. When a central bank adopts a dovish approach, it signals potential monetary easing measures, such as interest rate cuts or quantitative easing.

You’ll find another currency that belongs to a country with a Dovish monetary policy. So, investors will move their funds from other countries to earn higher interest rates here. This subsequently increases the inter-bank borrowing rate, mortgage rate and fixed deposit rate. Lower interest rates mean that businesses can borrow more affordably to invest in their growth in the long run.

Understanding Inflation Hawks

With lower interest rates, people borrow more, spend more, and invest in assets that could grow. Rising rates tend to boost real estate values, so real estate is another option for a hawkish environment. If you don’t want to hassle (and lack diversification) from buying properties yourself, you can also invest in real estate mutual funds, ETFs, or Real Estate Investment Trusts (REITs). If you expect rates to rise, then you probably don’t want to lock yourself into existing bonds for a long time. Instead, stick with shorter maturity bonds so you can benefit as rates go up. Alternatively, you can protect yourself by taking advantage of a floating rate ETF or mutual fund designed to take advantage of rising interest rates when they occur.

By studying these examples, investors and policymakers can learn about the strategies and effects of hawkish central bank decisions. Conversely, when a central bank adopts a dovish stance, it can lead to a decrease in demand for the currency, as investors see it as less attractive. Hawkish policymakers prioritize containing inflation and maintaining price stability, often through tightening monetary measures like interest rate hikes. As a result, their policies lead to currency appreciation and create a positive market sentiment due to their commitment to price stability.

Tools & Features

In trading, ‘hawkish’ means central banks want higher interest rates to fight inflation. They choose policies that keep prices stable over growing the economy. A country’s currency gets stronger when its central bank is hawkish. This is because higher interest rates draw in foreign investors looking for better returns, increasing demand for the currency. However, a hawkish monetary policy can also have negative effects on the economy. Higher interest rates can lead to a slowdown in borrowing and spending, which can lead to lower economic growth.

Higher mortgage rates will also put a damper on the housing market and can cause housing prices to fall in turn. Higher rates on car loans can have a similar effect on the automobile market. Although it is common to use the term “hawk” as described here in terms of monetary policy, it is also used in a variety of contexts. In each case, it refers to someone who is intently focused on a particular aspect of a larger pursuit or endeavor.

This article will explore what does it means in the context of forex and its impact on currency markets. Monetary policy is by far the primary driver of forex rates globally, as central banks heavily influence the total supply of currencies in the international market. A hawkish, or restrictive monetary policy, reduces the total supply of currency in circulation, causing its value to appreciate in the forex market.

International investors will move their money to a place where they can get higher interest rates. When interest rates increase, that will usually cause the value of a currency to rise. So while I’m going to make this as easy to understand as possible, the effect of monetary policy on a nation’s economy is never black and white. Hawks are those that want to see higher interest rates, while doves are those who would prefer interest rates to remain low. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey.