U.S. dollar drops after Fed statement

U.S. dollar drops after Fed statement

U.S. dollar drops after Fed statement

After the March meeting, Fed Chairman Jerome H. Powell said a number of policymakers had brought up USA trade policy in their discussions and that business leaders in their regions had said trade policy was "had become a concern going forward". In other words, two percent is not viewed as a ceiling for inflation. Theoretically, this should somewhat curtail capital outflows from emerging markets. This means that interest rates are likely to rise going ahead. While the Fed left interest rates unchanged on Wednesday, it is possibly set to raise them by a total of 75 basis points this year. The Institute for Supply Management (ISM) survey published on Tuesday showed USA factory activity slowed in April, but it highlighted shortages of skilled workers and rising costs, suggesting inflationary pressure is building.

The Fed noted that consumer prices rose 2 percent in March year-over-year.

However, another important reason for dollar strength, in past couple of days, is to do with subdued and somewhat weak economic data for the euro zone.

In the end, the Fed meeting was a "wait and see" moment. The dollar index slipped 0.1 per cent. External factors like demand for the Dollar is dictating the majority of swings in the global currency markets, explaining why the Dollar unexpectedly making a turnaround over the previous fortnight has resulted in the Rand moving back to levels not seen since December 2017.

Last week, government economists estimated that United States gross domestic product grew in the first quarter of 2018 at an annual rate of 2.3%. Likewise, the Japanese economy had enjoyed eight straight quarters of expansion, the longest such run since the 1980s. In the near term, the recent weak economic data readings in Europe could keep the pressure on the Euro and the GBP - with expectations of tighter monetary policy moderating. Again, the Easter effect is partly to blame, with services price inflation falling to just 1.0% year over year from 1.5% year over year in the previous month and against that background our medium term inflation outlook has not changed and we don't expect the central bank to scrap the intended exit from QE.

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For now, the Fed predicts rosier times ahead for the U.S. economy with more Americans likely to get jobs and possibly even higher pay as companies struggle to find and keep good workers. As rates rise, Americans feel it because their credit card rates also climb, as do the rate for mortgages, auto loans and small business loans.

"That indeed leaves the Fed as the only tightening game in town", Wall said. Similarly, the UK/U.S. yield gap widened this week to the most since 1984.

The U.S. dollar index decreased on Wednesday as investors were digesting the latest Federal Reserve statement. The Japanese Yen would also likely benefit if the trade talks between the USA and China did lead to a period of renewed uncertainty in the market.

That shift to unhedged buying, a dramatic move for bond investors, could lead to more dollar purchases, Lombard Odier's Ahmed said.

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