U.S. dollar drops after Fed statement

  • U.S. dollar drops after Fed statement

U.S. dollar drops after Fed statement

US stocks edged higher on Wednesday after the Federal Reserve released its policy announcement, leaving interest rates unchanged.

The revival of the USA currency after more than a year on the wane is already causing mayhem in emerging markets from Turkey to Argentina and Indonesia, while tightening global financial conditions in a way that could eventually make even the Fed consider a pause for thought.

Against a basket of currencies, the dollar index was trading at 92.545, after reaching the highest since late December at 92.834.

Against a broader group of currencies, including those from emerging markets, the greenback is now in positive territory against half of them.

First is the interest rate gap.

Currently, the futures market assigns 45 percent odds of three more quarter-point rate hikes before the end of the year, and that's something that hasn't been fully priced into stocks and bonds.

Volume on USA exchanges was 7.56 billion shares, compared to the 6.61 billion average over the last 20 trading days.

The Fed policy meeting ended with no change, as expected, while the central bank expressed confidence a recent rise in inflation to near target would be sustained, leaving it on track to raise borrowing costs in June.

The voting committee asserted that they still expect "further gradual increases" against the backdrop of a continually strengthening labour market and accelerated economic activity - with record low unemployment and accelerated wage growth being the primary driving factors. Overnight, stocks on Wall Street were plagued by rising concerns over worsening trade relations between the U.S. and China after the Donald Trump administration threatened to impose restrictions on Chinese telecoms companies' ability to sell telecoms equipment on the United States market.

The dollar's rally this year is quite a turnaround from 2017 when it weakened against every other currency.

The dollar has erased all its 2018 losses in the past fortnight.

The euro was on a roll, with the European Central Bank looking set to roll back its economic stimulus in September and raise rates in the first quarter of 2019. The Institute for Supply Management (ISM) survey published on Tuesday showed US factory activity slowed in April, but it highlighted shortages of skilled workers and rising costs, suggesting inflationary pressure is building. Likewise, the Japanese economy had enjoyed eight straight quarters of expansion, the longest such run since the 1980s.

Foley said buyers of euros remained at risk of weaker euro zone economic data.

The Fed lifted its benchmark rate three times previous year - while also beginning to slowly trim its balance sheet.

For now, the Fed predicts rosier times ahead for the USA economy with more Americans likely to get jobs and possibly even higher pay as companies struggle to find and keep good workers.

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Wednesday. As rates rise, Americans feel it because their credit card rates also climb, as do the rate for mortgages, auto loans and small business loans.

"That indeed leaves the Fed as the only tightening game in town", Wall said. Similarly, the UK/U.S. yield gap widened this week to the most since 1984. The Indonesian Rupiah is showing a similar level of weakness to the Ringgit against the Dollar, which suggests that increased confidence that the Federal Reserve will raise U.S. interest rates in June is behind the currency moves.

The U.S. dollar bought 109.68 Japanese yen, lower than 109.80 Japanese yen of the previous session.

"It's hard to see investors willing to take increasing risk ahead of a couple more weeks of trade discussions and negotiations to come", said Matthew Miskin, market strategist at John Hancock Investments in Boston.