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USD: US dollar reasserts itself on landmark Fed announcement

H.S. Borji
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USD: US dollar reasserts itself on landmark Fed announcement

The US dollar surged Wednesday after the Federal Reserve ended its record bond buying program and signaled the US economy was recovering fast enough to begin considering a rate hike sooner than previously anticipated.

The US dollar index, a weighted average of the greenback against the euro, pound, yen, Canadian dollar, franc and krona, reached an intraday high of 86.04. It would later settle at 85.97, advancing 0.66 percent. That was the index’s highest level in three weeks. Wednesday’s advance snapped three consecutive daily losses that resulted from mixed US data and a shaky global economic outlook.

The dollar rose to a one-week high against the euro, as the EURUSD dropped 0.76 percent to 1.2631. The pair subsequently consolidated at 1.2638 ahead of the Asian session.

The greenback rallied to a three-week high against the Japanese yen, as the USDJPY climbed 0.67 percent to 108.88. The pair would subsequently consolidate at 108.75 ahead of Asian trade.

The British pound fell sharply from an intraday high of 1.6152 following the FOMC announcement. The GBPUSD pair would subsequently consolidate at 1.6010.

Wednesday’s biggest market mover was the highly anticipated Federal Open Market Committee rate announcement. Central bankers voted once again to reduce monthly bond purchases, this time by $15 billion, thereby closing the books on quantitative easing. The Fed, which began reducing bond purchases in measured steps last December, expressed confidence in the recovery, particularly with reference to the labour market.

The Fed’s language suggests policymakers may be warming to the idea of a rate hike. The official rate statement dropped the language of their being significant underutilization in the labour market, adding there is “sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.”

US employers added 248,000 payrolls in September, the seventh time in eight months job creation had eclipsed the 200,000 mark. The unemployment rate fell 0.2 percentage points to 5.9 percent, a six-year low. Economists anticipate another month of above-200,000 job gains for October. The Labor Department will release October employment data next week.

Regardless of when the Federal Reserve begins lifting interest rates, Wednesday’s announcement marks a clear divergence between the United States and other economies. The US Fed is on a clear course of policy normalization, whereas its global counterparts have a far less certain future. The European Central Bank, for example, is still expanding its monetary policy framework to avoid deflation and boost growth. Meanwhile, the Bank of Japan is facing increasing pressure to add to its policy framework in the face of weaker domestic growth and tame inflation.

The US economy grew at an annual rate of 4.6 percent in the second quarter, the biggest quarterly surge since 2011. On Thursday the Commerce Department is expected to show another strong quarter for the United States. US gross domestic product is forecast to grow at an annual rate of 3 percent between July and September.

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