Daily Management Review

Dollar Tumbled on Federal Reserve Announcement


03/19/2015


An unexpected forecast for growth as well as interest rates sent dollar on a tumble.



Despite downgraded economic outlook, the Federal Reserve’s indication about keeping the benchmark rate lower, has pulled down dollar by 3% against euro. Hence the currency recorded its largest one day drop in 6 years. Further, Fed also lowered its expectation for inflation rate and also signaled that the rise in interest rates will take place much gradually than earlier expected. This is a clear indication that the US economy is heading towards policy normalization. The Euro currency’s daily gain against dollar was at its highest since March 2009, with its trading volume reaching its peak since February 2012. However, the euro even slumped below $1.05 in March beginning, for the first time since 12 past years. This led to a rally in the US stocks.

In terms of rising interest rates, the US Federal Reserve dropped out the word “patient” from its statement however, lowered the economic as well as inflation projections for the year 2015. According to Federal Reserve, the economy is not in a situation to withstand the impact of steep hike in interest rates. The dollar appears to be susceptible in the short-run. Hence, Fed lowered its earlier projections of federal fund rate to 0.625% by 2015 end, as against its earlier forecast of 1.125% till December 2015. The statement about softening of interest rates by Federal Reserve has increased market awareness that the US economy is not performing as per expectations. The US central bank added that the April interest rate hike in quite unlikely.

The dollar currency dropped against Japanese yen and a number of other currencies. Moreover, the dollar fell about 2% against Mexican Peso to 15.13. It also tumbled more than 1% against Brazilian real to 3.21 while slashed even more than 3% against Russian ruble. A stronger currency can thereby lessen the pace of economic expansion by making the US exports much more expensive thereby restraining the inflation in medium term.
 
An unexpected downward outlook triggered some traders to question over the viewpoint that tightening of monetary policy by the US would stimulate dollar to extraordinary highs. Many investors gambled on robust dollar with the belief that the Federal Reserve would increase interest rates by June 2015 while world’s major central banks such as Bank of Japan and European central Bank would continue to develop the easy-money policies. It also attracted many money managers towards dollar in anticipation of huge returns mainly due to rise in interest rates. The dollar has come under huge pressure as Fed downgraded the growth prospects of the US economy. Still, Ms. Yellen stated that strong dollar are indication of a robust and sound economy.

The central bank also announced about its plan to buy $300 billion of long-term Treasury securities in next six months, stimulating its efforts to steer economic growth which in turn lead to dollar selling. According to CME group, the Fed-fund futures signals 23% probability of interest rate hike in July as against 425 earlier.



Tags : Dollar




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