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U.S. dollar dips as Fed keeps rates near zero

Source: cnbc.com

 

The U.S. dollar reversed gains to move lower on Wednesday following the latest policy statement from the Federal Reserve.

“Commodity prices are starting to go up and the price of anything in the production and supply chain is also starting to go up. There’s certainly a level of inflation there,” said Juan Perez, FX strategist and trader, at Tempus Inc.

“But I expect Powell to repeat what he has always said that price increases are expected especially after what we have gone through during the pandemic. But unless we hit full employment, the Fed will stay put,” he added.

While currency markets were generally calm, signs of nervousness were evident in the bond markets where yields on 10-year U.S. Treasury notes rose above 1.60% after tepid auction results.

U.S. yields on Wednesday ahead of the Fed were little changed, with those on the benchmark 10-year note at 1.627%.

With the consensus broadly that the Fed will remain on hold, any small shift in rhetoric could trigger an outsized move in markets.

In mid-morning trading, the dollar index slid 0.1% to $90.81, still above Monday's low of 90.679, its weakest level since March 3, though investors were not convinced a recent downtrend had ended.

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"The Fed has been fighting a rearguard action against calls for higher rates in the face of extremely strong data and the prospects of more stimulus, and most likely they will keep the same phrasing as before," said John Marley, CEO of forexxtra, a London-based FX consultancy.

Investors' inflation expectations, measured by the break-even inflation rate calculated from U.S.
inflation-linked bonds, rose above 2.40% on Wednesday, the highest level since 2013.

The euro slipped 0.1% to $1.2074, off Monday's two-month high of $1.2117.

The dollar stood at 108.97 yen, up 0.1% on the day, having jumped 0.59% overnight and extending its recovery from a seven-week low of 107.48 touched last week, in tandem with rises in U.S. bond yields.

Biden is expected to roll out a plan to raise taxes on the wealthiest Americans, including the largest-ever increase in levies on investment gains, in order to fund about $1 trillion in childcare and other social spending.

Elsewhere, the Australian dollar dropped 0.1% to US$0.7759 after the country’s consumer price index came in weaker than expected.

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