EC 3 Reasons Why The Dollar Sold Off Post FOMC

The U.S. dollar traded lower against most of the major currencies on the back of the Federal Reserve’s monetary policy announcement. EUR/USD rose to its strongest level in nearly 2 weeks while USD/JPY dropped back below 110. Interestingly enough, Fed Chairman Powell did not appear overly concerned about Delta.

In the press conference, he said, “What we’ve seen is with successive waves of COVID over the past year and some months now, there has tended to be less in the away of economic implications from each wave. We’ll see whether that is the case with the delta variety. But it’s certainly not an unreasonable expectation.”

This implies that policymakers will watch virus trends carefully but there’s no immediate cause for alarm or shift in expectations for taper. Barring a return to a complete lockdown, the Fed will continue their discussions on reducing asset purchases later this year.

Dollar, Money, Cash Money, Business, Currency, Finances

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The FOMC statement contained a few changes, none of which were extremely market moving. The Fed took out the line about vaccinations reducing “the spread of COVID-19” in the U.S. but also the word “significantly” from the sentence about the “path of the economy” continuing to “depend on the course of the virus”. This slightly less pessimistic outlook should have been positive for the dollar but the greenback sold off when Powell made it clear that while timing is being discussed, it could be months before an official announcement is made. Investors sold dollars for the following reasons:

1. Fed Downplayed Inflation Rise – Powell admitted that inflation is higher than expected but called for a bit of patience because he still believes price pressures will fade and most of the recent increases by businesses are one-offs.

2. Made No Decisions on Taper Timing – While Powell said the Fed took their “first deep-dive” on how to scale back bond-buying, no decisions about the timing of taper were made. He added that ideally you would not raise rates before you taper and they are still a ways away from considering raising interest rates

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