Federal Reserve’s Hawkish Tone and its impact on Dollar

The U.S. dollar once more demonstrated its strength on Friday, as it edged higher in early European trade, continuing to benefit from the Federal Reserve’s position. The greenback is still reaping the rewards of the central bank, taking a more hawkish stance sooner than expected. The Federal Reserve’s hawkish position represented an abrupt change from the previous meeting.

Additionally,  Fed Chair Jerome Powell indicated that members of the Federal Open Market Committee (FOMC) begun the conversation on stopping the bank’s massive bond-buying program. These moves suggest to the market that the days of readily abundant liquidity are coming to an end.

At 2:55 AM ET (07:55 GMT), the dollar index trades less than 0.1% higher at 91.933, after earlier hitting a more than two-month high. The index that tracks the dollar against a basket of six other currencies rose above 92. The index is on track for a weekly gain of 1.5%, its largest since September.

USD/JPY fell 0.1% 110.06 after climbing to an 11-week high of 110.82 one day earlier. EUR/USD was largely unchanged at 1.1906, just above its worst result in two months. GBP/USD dropped 0.1% to 1.3904, close to its lowest level in six weeks. The risk-sensitive AUD/USD declined 0.2% to 0.7536, near a two-month low.

Dollar and central banks

On Friday, the Bank of Japan made the decision to keep its key interest rates unchanged. The central bank decided to extend by six months the September deadline for its programs to help pandemic-hit firms.

The country’s economy is struggling to rebound from the measures put in place to tackle the Covid-19 pandemic after gross domestic product dropped an annualized 3.9% in the first quarter. Core consumer prices rose 0.1% in May from a year earlier, the first year-on-year increase since March 2020 but still far from the Bank of Japan’s 2% goal.

On Thursday, the Swiss National Bank as well as the Norges Bank, which is the central bank of Norway, also kept interest rates unchanged.

Turkey’s central bank also kept its key benchmark interest rate unchanged on Thursday. The central bank’s decision followed comments by the country’s President Recep Tayyip Erdogan. In early June, Erdogan stated talked about the need to lower interest rates this summer. He suggested July or August as possible dates for a rate cut. Erdogan’s statement sent the Turkish lira to record lows.