The United States Dollar dropped to a week low against its global counterparts on Wednesday after the Federal Reserve raised interest rates by 0.25% against the widely expected 0.75%.
The move came as a surprise to financial market operators for one reason, the U.S. inflation is at a record-high of 8.5%. However, the Fed highlighted rising global risks and uncertainties due to the ongoing COVID-19 restrictions in China and the Russia Ukraine war.
This, the central bank explains necessitates caution.
“The market was pricing in essentially a 50/50 chance that you see a 75 basis point hike by July, between June and July, and so I think the most important takeaway here that I think the market was really fixated on, was whether or not a 75 basis point hike is on the table, and he (Powell) basically pushed back on that,” said Mazen Issa, senior fx strategist at TD Securities in New York.
The United States dollar index declined to $102.48 from $103.64 it peaked on Wednesday immediately the Fed made its decision.
Against the Euro common currency, the United States dollar lost 0.82% to $1.0622. While against the Pounds Sterling and Yen, the green back dropped to $1.2625 and $129.12, respectively.
Stocks and other risky assets rose after Fed suggested it could curb inflation without necessarily triggering a recession.
US Dollar Gained Against Haven Currencies on Stimulus Withdrawal
The United States Dollar gained against safe-haven currencies on Wednesday after the Federal Reserve committee announced it has approved plans to speed up pandemic stimulus withdrawal process.
The Dollar Index rose to a three-week high of 96.87 on Wednesday before dropping to 96.14 on Thursday during the London trading session.
However, against the Japanese Yen, a known haven currency, US Dollar sustained its gain at 114.153, up from 113.52 on Tuesday. But the greenback failed to keep its gain against the Swiss Franc after hitting 0.92940 on Wednesday. It drops to 0.92318.
This was after the US Federal Reserve maintained interest rates at 0 to 0.25 percent to achieve maximum employment despite the surge in inflation to a four-decade high.
The Committee, however, agreed to reduce monthly stimulus purchases by $20 billion for treasure securities and $10 billion for agency mortgage-backed securities.
“Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.
“The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”
U.S Dollar Pares Losses Against Safe Haven Yen on Wednesday
The United States Dollar rebounded slightly from a three-day low recorded against major peers since the Federal Reserve announced tapering without plans to raise interest rates in spite of the inflation rate hitting 5.4 percent in the month of September.
The U.S dollar after trading near one month low against the Japanese Yen in the early hours of Wednesday rebounded from 112.76 to 113.15 at the time of writing. Widely regarded as safe haven, investors normally jump on Yen during a period of high uncertainty to curb risk exposure.
The dollar index, which measures the greenback against six major currencies, was largely unchanged at 93.997 after declining gradually from more than a one-year high of 94.634 it reached on Friday.
The Euro common currency was little changed at $1.1565, sustaining its three-day gain against the greenback.
Experts are predicting that a further increase in Consumer Price Index, which measures inflation, in October could force the Fed to raise interest rates than previously anticipated. Economists polled by Reuters are predicting 0.4 percent for CPI in October, up from 0.2 percent in September.
Still, We’ll need to see a print of 0.8% month-on-month to see the dollar index break out of the top of the range of 94.50,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.
Although the dollar has been trending lower against the yen, “if U.S. CPI comes in hot then this poses a risk to USDJPY shorts,” he wrote.
U.S Dollar Jumps to Three Weeks High on Better Than Expected Retail Sales
The United States Dollar rose to a three-week high after data from the Commerce Department showed that the U.S retail sales rebounded in the month of August despite falling consumer confidence.
The US Dollar Index rose to 93.40 on Monday to extend Friday breakout above the 93.00 key resistance level.
U.S retail sales jumped to its highest in five months in the month of August to beat 0.8 percent decline predicted by experts. Retail sales grew by 0.7 percent in August to increase the odds of the US Federal Reserve announcing tapering during next week’s Federal Open Market Committee (FOMC) meeting.
“U.S. consumption is not slowing as quickly as it appeared a month ago despite the fading stimulus, and the Delta variant did not much affect the industries feeding into retail sales,” said Chris Low, chief economist at FHN Financial in New York. “The economy continued to hum in August.”
Against the Japanese Yen, the U.S dollar strengthened to 109.48 from 109.91 attained on Friday on broad-based selloff during London trading session, while heavy selloff plunged British pound against the U.S dollar 1.36610 before reboundling slightly to 1.36946.
The Euro dropped from 1.17883 recorded on Friday to 1.16995 on Monday during London trading session.
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