US dollar's gains from post-Fed meeting fizzle out

London

HAVING ridden a short-covering rally sharply higher after the Federal Reserve left interest rates on hold, the US dollar erased virtually all of those gains on Thursday, as markets digested the US central bank's policy statement.

The greenback rebounded across the board in late Asian trade, posting its biggest daily rise in more than a week, as dealers unwound short positions taken ahead of the Fed decision.

But with the new guidance from the Fed focused on keeping US interest rates at current record lows until employment and inflation reach its targets, some strategists argue any US dollar strength is likely to be temporary.

At its policy meeting, the Fed pledged to keep rates near zero until at least the end of 2023, when the labour market reaches "maximum employment" and inflation is on track to "moderately exceed" the 2 per cent target.

With these conditions last met between March and October 2018, Commerzbank strategists said the Fed was imposing conditions for rate hikes that were met only very rarely in the past.

"The headlines focus mainly on the fact that the Fed does not expect any rate hikes until year-end 2023 based on its revised projections, but if one takes the forward guidance literally it might take much longer until rate hikes will be considered," they said.

Against a basket of its rivals, the dollar index rose about 0.32 per cent to trade at 93.493, before erasing most of its gains to trade nearly flat on the day at 93.22. It fell to more than two-year lows below 92 earlier this month.

The US dollar's weakness helped stem some of the selling pressure on other currencies such as the euro and the Australian dollar.

The single currency briefly hit a one-month low in Asian trading at US$1.1737, before trimming some losses to stand 0.2 per cent lower on the day at US$1.1792.

Among Asian currencies, the Australian dollar was the hardest hit, falling 0.4 per cent to US$0.72770 despite strong jobs data.

The safe-haven Japanese yen changed hands at 104.76 against the greenback, a 2½-month high.

The pound was broadly flat at US$1.2958, after dropping more than 3.5 per cent against the greenback and the euro last week. Sterling traders are now focusing on a meeting of the UK central bank, where it is likely to signal it is ready to pump more stimulus into Britain's coronavirus-hit economy. REUTERS