What Does Dovish Mean in Forex Trading?
Quick Answer: Dovish describes a central bank policy stance favoring lower interest rates to stimulate economic growth. When central bankers are dovish, they prioritize employment and growth over inflation control, which typically weakens the currency.
What Does Dovish Mean in Forex?
A dovish central bank policy favors lower interest rates and economic stimulus over fighting inflation. The term comes from doves being peaceful birds - dovish policymakers prioritize economic growth and employment, even at the risk of higher inflation.
Why Dovish Policy Weakens Currency
Lower interest rates make a currency less attractive:
- Lower returns: Investors earn less on deposits and bonds
- Capital outflows: Money leaves to find better returns elsewhere
- Decreased demand: Fewer buyers cause currency depreciation
- More money supply: Easier monetary policy can devalue currency
Dovish Language to Watch For
Central banks use specific phrases to signal dovish intentions:
- "Supporting economic recovery" - Priority on growth, not inflation
- "Inflation is transitory" - No urgency to raise rates
- "Patient approach" - Delaying rate increases
- "Accommodative policy" - Keeping conditions easy
- "Monitoring economic data" - Not ready to tighten yet
The Dovish-Hawkish Spectrum
| Factor | Dovish | Hawkish |
|---|---|---|
| Interest Rates | Lower/Cut | Higher/Raise |
| Priority | Growth & Jobs | Price Stability |
| Currency Effect | Weakens | Strengthens |
| Inflation Tolerance | Higher | Lower |
Practical Example
During the 2020 COVID pandemic, the Federal Reserve became extremely dovish. They cut rates to 0-0.25% and started quantitative easing (printing money to buy bonds). Fed Chair Powell stated they would keep rates "near zero until inflation consistently exceeds 2%." The result? USD/CAD fell from 1.46 to 1.20 as the US dollar weakened against the Canadian dollar.
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