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US Dollar Remains Subdued as Fed Reduces Stimulus, Downgrades Growth Forecast

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US Dollar Remains Subdued as Fed Reduces Stimulus, Downgrades Growth Forecast

The US dollar was trading lower against a basket of currencies amid signs the Federal Reserve won’t rush to raise interest rates, despite tapering bond purchasing by another $10 billion.

The US dollar index, a broad performance measure of the greenback’s strength against six major peers, declined 0.15 percent to 80.51.

The index was holding firm after the Labor Department on Tuesday said consumer inflation rose 2.1 percent annually in May.

Month-on-month, consumer prices increased 0.4 percent, the highest one-month gain since February 2013.

The Federal Reserve today reduced the pace of record stimulus for the fifth time in as many meetings and kept the benchmark interest rate unchanged at 0.25 percent. The Fed reduced its holdings of mortgage-backed securities from $20 billion per month to $15 billion, and reduced its holdings of Treasury securities from $25 billion per month to $20 billion.

The central bank lowered its growth forecast this year from nearly 3 percent to between 2.1 percent and 2.3 percent, and kept its forecast for 2015 unchanged. The revised 2014 estimate is the result of a severe winter that saw the economy contract 1 percent annually.

The Fed acknowledged today in its rate statement that growth had rebounded in recent months, as the labour market continued to improve at a marked pace.

US employers added 217,000 nonfarm payrolls in May, following a gain of 282,000 in April.

However, Fed officials were less likely to say interest rates would rise above the historical norm of 4 percent in coming years, a sign policymakers probably won’t rush to raise interest rates.

Eleven of the Fed’s 16 top officials forecast interest rates to be below the historical average of 4 percent over the next few years, according to the “dot plot” charts. Only six Fed officials held that view in the spring.

The euro advanced for a second consecutive day against the dollar, as the EURUSD rose 0.21 percent to 1.3575. The pair reached an intraday high of 1.36 for the first time in nearly three weeks.The pair is likely to face support at 1.3526 and resistance at 1.3579.

In Eurozone data, construction output increased in April at an annual rate of 8 percent, the European Commission reported today.

Sterling peaked at 1.6993 US Wednesday, just below its five-year high. The GBPUSD consolidated near its intraday high, advancing 0.19 percent. The trend line shows initial support at 1.6937 and resistance at 1.7016.

The dollar edged lower against the Japanese yen, with the USDJPY falling 0.26 percent to 101.90. Initial support is located at 101.87 and resistance at 102.33.

The greenback edged lower against its Canadian counterpart. The USDCAD was trading at 1.0846, declining 0.14 percent. The trend line shows initial support at 1.0841 and resistance at 1.0879.

In Canadian data, wholesale sales increased 1.2 percent in April, well above forecasts.

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