Sat, January 28, 2023

Here Is how Fed’s Recent Policy Impacting the Dollar

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Following the Federal Reserve’s announcement that U.S. interest rates will likely climb above what investors now anticipate, the dollar increased on Thursday, supported by a significant increase in Treasury yields. At the same time, the pound declined ahead of a Bank of England policy meeting.

As anticipated, the Fed increased its target funds rate by 75 basis points (bps) to 3.75–4% on Wednesday. The Fed’s announcement of upcoming lesser rises originally declined the dollar. Still, it recovered when Chair Jerome Powell stated that the fight against inflation would necessitate higher borrowing rates. He stated that it is quite early to be thinking about halting. Incoming data since our last meeting shows that the eventual level of interest rates will be higher than previously predicted.

What To Expect?

Powell’s hawkish remarks shattered any hopes that the central bank would soon adopt a less aggressive attitude, which caused the dollar to rise to a two-week high of $0.9810 against the euro. The most susceptible to changes in interest rate expectations are two-year U.S. Treasury rates, which last increased 11 basis points to 4.68%, the highest level since July 2007.

The response to the Fed meeting was more hawkish, suggesting that the terminal rate that markets are pricing in at approximately 5% might be higher in particular. According to Valentin Marinov, director of G10 FX strategy at Credit Agricole (OTC: CRARY), this certainly increased the attraction of the dollar and U.S. yields. The dollar index reached 112.70, its highest weekly level, up 0.5% daily.

This is about the ‘dollar grin,’ whereby the dollar gets bolstered anytime the Fed leads the fight against inflation; it is one of, if not the most, hawkish central banks. The dollar is also bolstered when the Fed’s activities increase risk aversion. Marinov added that the response illustrates how those two forces interact. The dollar index reached 112.70, its highest weekly level, up 0.5% daily.

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