Dollar Slips After Fed More Dovish Than Expected
The U.S. dollar wallowed at its lowest in nearly two weeks against a basket of major currencies on Thursday, in the wake of the Federal Reserve’s cue that U.S. interest rates will stay low for a while.
The New Zealand dollar soared to a record high against a basket of currencies after the Fed’s dovish stance.
New projections suggested the Fed saw rates rising more in 2015 and 2016 than it had previously forecast, but officials lowered their long-term rate target. The Fed also sounded comfortable with the inflation outlook despite recent signs of a pick-up in price pressure.
Fed chief Janet Yellen said there had been “a slight decline of projections pertaining to longer-term growth” that prompted Fed officials to lower their view of the expected long-term federal funds rate from 4 percent to 3.75 percent.
As a result, U.S. Treasury yields fell, with the benchmark 10-year rate US10YT=RR dropping to 2.579 percent in Asia from its U.S. close of 2.615 percent.
“We’re seeing broad extension of the U.S. dollar weakness,” said Sue Trinh, currency strategist at RBC Capital Markets.
“Going forward, U.S. dollar weakness is likely to be sustained unless we get a sea change in the communique coming from the Fed, so upside risks look likely for euro, kiwi and Aussie,” she added.
The dollar index .DXY unwound all of the gains made in the lead-up to the Fed meeting. It slipped 0.3 percent on the day to 80.378, and fell as far as 80.353, a level not seen since June 9.
Against the yen, the greenback was nearly flat on the day at 101.91 JPY=, down from a one-week high of 102.38 yen hit on Wednesday before the Fed’s announcement, while the euro was slightly lower at $1.3589 after it touched $1.3600 EUR= on Wednesday.
“In the end, it was just merely a battle of positioning as traders unwound positions in anticipation of a more hawkish Fed tone following the spike in CPI,” said Stan Shamu, market strategist at IG in Melbourne.
The Fed cut its monthly bond buying program by a further $10 billion to $35 billion in a widely expected move and expressed confidence that the economic recovery remained on track.
Another cloud looming on the horizon and sapping investors’ risk appetite was Argentina’s threat of default on its debt. On Wednesday, that country’s government called it “impossible” to pay bond service due on June 30, citing a U.S. court decision earlier in the day. (Full Story)
Investors also kept a wary eye on the ongoing insurgency in Iraq. The government has requested U.S. air support as it fights Sunni rebels who have seized major cities.
Commodity currencies fared particularly well against the dollar with the New Zealand currency rallying nearly 1 percent ti hover around six-week highs of $0.8736 NZD=D4. It was last down 0.2 percent at $0.8713. On a trade-weighted basis, the kiwi =NZD rose to a record high of 81.30.
The outlook for higher New Zealand interest rates was reinforced by data showing the economy grew a solid 1.0 percent in the first quarter from the previous quarter, a result that cemented New Zealand as one of the fastest-growing developed economies.
The Australian dollar was steady on the day at $0.9404 AUD=D4, having gained 0.7 percent on Wednesday.
Source : Reuters
