Dollar Falls on Fed’s Decision to Accelerate Asset Purchase Tapering
The US dollar was lower against its major trading partners early Thursday, apart from the yen, as markets digest the FOMC’s decision to accelerate its pace of asset purchase tapering in their statement Wednesday afternoon.
While equity markets rallied on the news of a more hawkish Fed stance, the shift toward risk-taking was a drag on the dollar. The updated Summary of Economic Projections also showed an inclination toward up to three rate increase next year, compared with only one increase in the September SEP.
Analysts expect those increases to start in June, with further upward adjustments in September and December.
Federal Reserve Chairman Jerome Powell said in his post-meeting press conference that the brisk rate of inflation makes it appropriate to accelerate the pace of tapering now and that it may be necessary to raise rates before the economy reaches maximum employment if the inflation component of the Fed’s mandate remains elevated.
Another busy data schedule is in store for Thursday, with the release of November home building data and industrial production, the December IHS Markit flash estimates for manufacturing and services, and weekly initial jobless claims the highlights of the day.
In addition, there is a wealth of central bank meetings Thursday, including the Bank of England, the European Central Bank, and the Bank of Japan.
A quick summary of foreign exchange action heading into Thursday shows that USD-CAD slipped to 1.2771 from 1.2833 at the Wednesday US close and from 1.2878 a day earlier, but the pair did climb to 1.2906 right before the FOMC announcement before falling off sharply.
Canada is light on data Thursday, unlike the US and other major countries, with only ADP employment data on the schedule. The Bank of Canada’s new mandate announced last week is more in line with the US in allowing inflation flexibility, but the BOC could find itself in the same position the Fed was previously, defending patience on soaring inflation.
USD-JPY rose to 114.1907 from 114.0558 at the Wednesday US close and well ahead of the 113.8023 level a day ago after a large boost from the FOMC meeting.
The hawkish shift from the Fed makes the Bank of Japan’s expected stance after its meeting this week appear to be even more dovish. Japanese data out overnight showed a deterioration in the trade balance and declines in the flash IHS Markit PMI readings for manufacturing and services; though both remained above the breakeven point.
EUR-USD rose to 1.1305 from 1.1295 at the Wednesday US close and 1.1271 a day earlier.
The pair hit a low of 1.1228 just before the FOMC announcement before rebounding sharply on renewed risk-taking. The flash IHS Markit estimates for the Eurozone released earlier Thursday showed a slowdown in growth for both the manufacturing and services sectors in December ahead of the ECB’s meeting Thursday morning.
The ECB is expected to provide more details on how it will taper its asset purchases, but the emergence of omicron cases will likely push off the start date of reductions.
GBP-USD jumped to 1.3359 from 1.3262 at the Wednesday US close and 1.3258 a day ago, with most of the upward momentum Thursday morning after the Bank of England chose to hike interest rates to fight inflation despite rising cases of the omicron variant that pulled the flash IHS Markit estimates for manufacturing and services in the UK lower.
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