Dollar is holding up well
Meanwhile, the Fed is heading for an interest rate hike
Marcus Stuart (MS)May 9, 2025
The dollar eased on Wednesday after the US Federal Reserve said it would begin rolling back its pandemic-era stimulus but maintained its belief that high inflation would prove "temporary" and probably not one swiftly Would require increase in interest rates.
The Fed announced that it would reduce its monthly purchases of $ 120 billion in government bonds and mortgage-backed securities by $ 15 billion, but gave little indication of when it would enter the next phase of "normalizing" its policy by increasing the Could initiate interest rates.
The dollar index fell on the Fed's statement, bottoming out before recovering some of the losses, most recently falling 0.045% to 94.068, still within reach of its 2021 high of 94.563 last month.
The dollar's initial sell-off after the Fed announcement was likely profit-taking, said Scott Petruska, chief currency strategist for Silicon Valley Bank.
"The market was extremely long in the dollar at the time, and it still is," he said.
For the remainder of the quarter, the dollar will be driven by relatively higher US yields, the Fed's eagerness to stop inflation, and to some extent admit that inflation may not be as transitory as it was initially thought and as a safe haven be supported, he said.
The Fed's announcement follows the meetings of the Reserve Bank of Australia on Tuesday and the European Central Bank last Wednesday, both of which opposed the market pricing in tighter policies. The Bank of England meets on Thursday.
ECB President Christine Lagarde said a rate hike in 2022 was very unlikely as inflation was too low, which caused government bond yields to fall. But the euro hardly moved.
Against the euro, the dollar was almost unchanged at $ 1.15825. That was not far from the low of $ 1.1522 reached in October, the dollar's strongest level since July 2020.
The dollar / yen was trading at 114.125, near a four-year high.
The RBA abandoned its short-term rate target on Tuesday, dropping its expectation to keep rates at record lows through 2024, despite the Aussie falling as the bank also rolled back its aggressive asking rates for rate hikes in 2022.
The Aussie was down 1.2% against the dollar on Tuesday and closed at $ 0.7425 on Wednesday, down 0.05% from the start of trading. The New Zealand dollar was also dragged 1% on Tuesday but found support from strong labor data on Wednesday, rising 0.27% to $ 0.71285. [AUD /]
Money markets scaled back expectations for a 15 basis point rate hike by the Bank of England on Thursday, but they still anticipate a hike before 2022.
"The key question is how effective a rate hike will be in controlling inflation, mainly driven by supply chain problems, once we move out of the pandemic," said Giles Coghlan, senior currency analyst at HYCM.
The BoE is also focused on the labor market data and may decide not to hike rates on Thursday as it does not want to hike rates too early and jeopardize business recovery, "he said.
The pound sterling rebounded from a two-week low, trading 0.3% higher at $ 1.36525.
