FOMC Strengthened US Dollar

March 20, 2014

Washington (Mar 20)  Yesterday, US Dollar again witnessed a positive daily close against majority of its counterparts after monthly meeting of FOMC (Federal Open Market Committee) fuelled the greenback for the fourth time in previous five meetings. The two-day monthly meeting of the Federal Reserve came to an end yesterday with the statement that they may hike benchmark interest rate sometime during the second half of next year. The US Dollar rallied after the announcement as market players considered the statement more hawkish.

The policy makers also said that they would consider broader set of economic indicators than majorly concentrating on unemployment rate for future alteration into the monetary policy. Moreover, the monthly asset purchase program by the Federal Reserve continued witnessing the planned tapering, resulting the monthly bond buying to remain at $55 billion from $65 billion during the previous month. The committee's longer term projections from economic growth remained slightly lower while inflation expectations remained unchanged.

Jannet Yellen, the newly appointed Fed Chair Woman, addressed her first press conference after being the head of Federal Reserve. She was considered to be hawkish by market players after delivering the comment that the borrowing cost (benchmark interest rates) should start rising after the Federal Reserve shut down the monthly asset purchase program. US Dollar Index (I.USDX) tested the highest level in more than two weeks after the comment.

On the economic front, US Building Permits witnessed second best monthly performance since the recession witnessed in the year 2009 while Empire State Manufacturing and CPI figures depicted weaker image of US economy. Moreover, US Housing Starts matched the previous revised release of 0.91M.

Hawkish statement by FOMC and absence of major economic releases in the upcoming week can support the US Dollar in near term; though, severe negative releases from the scheduled economic events can adversely affect the greenback.

Rest of the world currencies witnessed negative wipes, headed by the New Zealand Dollar which lost heavy weights after its Q4 2013 GDP release declined to 0.9% from the revised 1.2% witnessed during the previous three months.

Chinese currency was also badly hit due to the People's Bank of China's intervention and the comment by China Securities Journal that said the default risk of corporate bonds is rising. The central bank of china lowered the daily fixing to the weakest level since Nov. 6. The pessimism from china was spread to the economies which are closely related to china, i.e. Australia, Canada and New Zealand.

Even after witnessing better than expected Claimant Count Change, GBP couldn't witness strength as market turned US Dollar positive. Moreover, comments from Bank of England's policy makers in the minutes of monthly monetary policy meeting, released yesterday, revealed that further gains in the currency were possible as the economy expands.

Geo-political tensions over Ukraine remained high as Russian President signed a treaty on Tuesday making Crimea part of Russia by openly refusing the Ukrainian Protest and Sanctions by Western economies. European Union leaders are gathering today to prepare unified sanctions over Russia. The absence of peace into the Ukraine has been supporting the safe haven demand of Gold, Japanese Yen and US Dollar in particular order. Should the tensions continue taking center stage of global market, demand for these safe haven assets could witness buying support.

Source: ActionForex

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