The US Dollar is moving broadly higher with Treasury yields as traders digest the latest update from the Federal Reserve just crossing market wires. FOMC officials decided to leave the target Fed funds rate range unchanged at 0.00-0.25% as widely expected. The Fed announcement echoed plans to maintain its current pace of asset purchases (i.e. QE) at $120-billion per month and also reiterated that monetary policy will remain accommodative until its long-term inflation and employment objectives are reached.

US DOLLAR PRICE CHART WITH TEN-YEAR TREASURY YIELD OVERLAID: 15-MINUTE TIME FRAME (16 MAR TO 17 MAR 2021)

Chart by @RichDvorakFX created using TradingView

Interestingly, the latest Federal Reserve statement included a shift in language that noted how indicators of economic activity have picked up. Though looking at the latest dot plot projections from FOMC officials, no rate hikes are seen through 2023 in light of stubbornly subdued inflation. This disappointed US Dollar bulls and sent the broader DXY Index snapping sharply lower alongside softer Treasury yields. Gold price action popped higher, as did the Nasdaq, following a weaker US Dollar and softer Treasury yields. The ten-year Treasury yield is off session highs by about 3-basis points but still hovers above 1.66% at the time of writing.

FEDERAL RESERVE ECONOMIC PROJECTIONS – MARCH 2021

Chart Source: Federal Reserve

This seems largely in line with recent commentary from Fed Chair Powell outlined during his speech late last month where he said the central bank is not concerted about financial conditions tightening despite surging Treasury yields. Powell added that bond yields are just one of several metrics tracked and used to gauge broader financial conditions.

To that end, credit spreads remain tight, and judging by the National Financial Conditions Index published weekly by the Chicago Fed, there seems to be little evidence pointing to tighter financial conditions. Furthermore, several FOMC officials have welcomed the rise in sovereign bond yields seeing that it reflects better economic outlook for the US economy. Keeping the target Fed Funds rate low looks to help boost Fed credibility given its new pursuit of average inflation targeting (AIT). Looking ahead, markets now await the follow-up press conference hosted by Fed Chair Powell where he will look to provide additional color on the latest FOMC announcement.