US dollar gains after Fed shifts inflation target

New York

THE US dollar gained on Thursday in choppy trading after Federal Reserve chairman Jerome Powell said, as widely expected, that the US central bank would roll out an aggressive new strategy to lift US employment and inflation.

Under the new approach, the US central bank will seek to achieve inflation averaging 2 per cent over time, offsetting below-2 per cent periods with higher inflation "for some time", and to ensure employment does not fall short of its maximum level.

"The market expected most of this," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

There are doubts about whether the Fed will be able to lift inflation, despite the new target.

"The Fed hasn't achieved its inflation targets since 2012, and so now they're saying now we're serious about it . . . don't think that's what creates inflation, or really the inflation expectations," Mr Chandler said.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The US dollar index initially sank on the announcement, before rebounding to last be up 0.53 per cent on the day at 93.31.

The euro fell 0.51 per cent to US$1.1769.

Longer-term, if the Fed is able to increase price pressures but also leave rates near zero for longer, the policy would be negative for the US dollar.

"What's going to happen is when you have all the other central banks starting to pull back their stimulus, starting to show signs of tightening, the Fed is going to lag on that, said Edward Moya, senior market analyst at Oanda in New York.

"You're going to see that interest rate differential not be in the dollar's favour. It's just providing a longer-term bearish outlook for the greenback," he said.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits hovered around one million last week, suggesting the labour market recovery was stalling as the Covid-19 pandemic drags on and financial aid from the government dries up.

The British pound reached an eight-month high of US$1.3283 against the greenback earlier on Thursday, before falling back to US$1.3170.

The Chinese yuan was at its strongest since January after data showed a recovery in profits at China's industrial firms.

The offshore yuan stood at 6.8827 per US dollar, having risen before to 6.8699, its strongest since Jan 21.

The market appeared to ignore the latest sign of rising tension between the United States and China. The US on Wednesday blacklisted 24 Chinese companies and targeted individuals over construction and military activity in the South China Sea. REUTERS