Powell Reaffirms Dovishness, Sends Dollar Lower

• Stocks Erase Gains on Powell’s Comments
• Fed Sees No Rate Hike, No Taper = Broad Based Dollar Decline
• GBP Breaks 1.41 Despite Mixed Labor Data
• RBNZ Expected to Leave Monetary Policy Unchanged

Investors sold U.S. dollars after Federal Reserve Chairman Jerome Powell made it very clear on Tuesday that there will be no interest rate hikes or tapering in the foreseeable future. The U.S. economy is recovering, inflation is on the rise and with more Americans getting vaccinated, the outlook is bright. In fact, Powell expects to raise the Fed’s 2021 GDP forecast to the range of 6%. Yet these improvements are not enough for the central bank to move away from their commitment to keeping monetary policy easy until a sustainable recovery returns the economy to pre-COVID levels.

10 and one 10 us dollar bill

Image Source: Unsplash

In his semi-annual testimony on the economy and monetary policy Powell said substantial progress has not been made towards their goals. The Fed is committed to using their full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible. Powell said job growth alone won’t drive their decision. Investors didn’t believe him when he said rates need to remain at current levels until the economy reaches maximum employment and inflation hits 2% in early February. Today he said they want to see inflation moderately above 2% for some time before tightening and when the time comes to change the pace of asset purchases, they’ll make their intentions very clear. There will be no surprises.

By pledging to keep interest rates where they are now for the next year or two, Fed Chairman Powell endorsed a decline in the U.S. dollar. Inflation expectations was the primary reason for the surge in Treasury yields and now that Powell said he’s not worried about the increase, we could see rates descend from their highs. Combine that with the prospect of more spending and there could be further weakness in the greenback particularly the USD/JPY pair.

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