Fed Can’t Keep The Dollar Down

The U.S. dollar traded higher against all of the major currencies on Thursday, erasing most of its post FOMC losses. The Federal Reserve has no plans to raise interest rates until 2023 but the recovery in the dollar and rise in Treasury yields tell us that investors continue to be drawn to the economy’s positive outlook. Today’s strong rise in the Philadelphia Fed index reinforces the central bank’s upgraded economic projections. The Philly Fed measure jumped from 23.3 to 51.8, its best reading in 48 years. Month after month, we’ve seen manufacturing drive the recovery and it won't be long before services follow. The Fed can’t keep the dollar down because vaccine rollout and stimulus checks will make for strong second quarter and second half recovery.

U.S. dollar banknote with map

Image Source: Unsplash

USD/JPY is at risk of a near-term correction but we do not expect the losses to last. The Bank of Japan has a monetary policy announcement this evening and they are the only central bank that could change interest rate policy this week. They are widely expected to widen the band that long-term interest rates are allowed to move. Currently, rates are allowed to fluctuate within the 0.2% band of their zero-rate policy but that could be adjusted to 0.25%. They could also eliminate the numerical target for their bond-buying program. Actions like these would make the central bank more conservatively dovish.

The recovery in the U.S. dollar drove USD/CAD higher for the first time in 8 trading days. Canadian retail sales are due for release tomorrow and while the labor market recovery should help to spend, wholesale sales were weak. USD/CAD is deeply oversold so if retail sales surprises to the downside, we could see a stronger recovery.

The Bank of England voted unanimously to leave monetary policy unchanged and like the dollar, sterling sold off after the rate decision. According to the policy statement, “The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.” This dovish outlook makes it clear that the central bank is not even thinking about raising interest rates. Although GBP/USD traded lower, GBP rose to its strongest level versus EUR in more than a year.

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