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Dollar Index Resumes Uptrend Following Sharp Selloff

H.S. Borji
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The US dollar rebounded on Thursday, posting its biggest single day rally in 18 months following a cautious Federal Reserve interest rate statement.

The US dollar index, a trade-weighted average of the greenback against a basket of six currencies, climbed 0.41 percent to 98.96. The index reached a daily high of 99.21 after plunging more than 1.7 percent on Wednesday. The losses were triggered by a cautious Federal Reserve policy statement.

Policymakers dropped the word “patient” in describing the period before raising interest rates, but said any future rise in the federal funds rate would be very slow. Fed officials lowered their median estimate of the federal funds rate to 0.625 percent by the end of 2015, compared with a December estimate of 1.125 percent. This means that, while a June rate increase is possible, it is unlikely. Based on the revised estimate, the Fed could begin raising interest rates in September, leaving just enough room for one or two adjustments this year.

“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium-term,” the Fed said on Wednesday.

Officials also lowered their economic growth and inflation forecasts on Wednesday. The economy is projected to grow 2.3 percent to 2.7 percent this year, compared with a December forecast of 2.6 percent to 3 percent. The economy is forecast to grow at the same rate in 2016 before moderating at a 2 percent to 2.4 percent pace in 2017.

The outlook on PCE inflation was lowered to 0.6 percent to 0.8 percent on the year from a December estimate of 1 percent to 1.6 percent. Inflation is expected to approach its target level next year. The Fed’s policy statement noted concern that inflation was running below expectations, stemming from the protracted drop in energy prices over the past eight months.

The outlook on employment improved, as policymakers anticipate unemployment will fall to 5 percent to 5.2 percent in 2015. In December the Fed anticipated the unemployment rate to fall to 5 percent to 5.3 percent by the end of the year.

The dollar was higher across the board on Thursday, advancing 1.1 percent against its Canadian counterpart. The USDCAD climbed to an intraday high of 1.2765. It would subsequently consolidate at 1.2719.

The EUR/USD, which had briefly climbed above 1.10 on Friday, declined 1.6 percent to 1.0662.

The dollar strengthened against the Swiss franc, climbing 0.9 percent to 0.9916 after falling below parity on Wednesday.

The USDJPY resumed its uptrend on Thursday, climbing 0.5 percent to 120.82.

The GBPUSD also retreated from Wednesday’s highs, declining 0.8 percent to 1.4831. The pair had previously climbed above 1.50.

 

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