Stocks Sell Off, Dollar Follows

Twenty four hours after the Federal Reserve pledged to keep interest rates at zero until 2023, the US dollar extended its losses against all of the major currencies. The greenback fell the most against the euro and the New Zealand dollar and was the most resilient versus Aussie and Sterling. The day started with very little consistency for the greenback but by the end of the NY session, despite losses in stocks, it was clear that the Fed’s dovish outlook made the dollar less attractive. The latest US economic reports were mostly weaker than expected. Housing starts and building permits declined in the month of August while the Philadelphia Fed index failed to show improvements like the Empire State survey. Yet USD/JPY rallied thanks in part to lower jobless claims. The Bank of Japan’s decision to leave monetary policy unchanged was widely expected. Although they upgraded their economic assessment, there was very little reaction in the Yen because at the end of the day, the government is in no position to increase or decrease stimulus. USD/JPY which sold off for 4 consecutive trading days should bounce if equities recover but the trend of mixed US data combined with the Fed’s dovish long term policy means the path of least resistance should be lower.

The Bank of England also left monetary policy unchanged but unlike the BoJ, their outlook was slightly more dovish. The central bank described the economic outlook as “unusually uncertain.” This cautious stance should be no surprise given the serious risk of a no-deal Brexit, rise in coronavirus cases, return of some social distancing measures, and expiration of a program that helped millions of unemployed workers. While the decision to keep policy unchanged was unanimous with no members voting in favor of immediate easing the central admitted that they were briefed on negative interest rates and their potential effectiveness. This suggests that they are considering more stimulus which can be very bearish for the currency especially as they are on the few central banks actively considering more easing. In fact, there’s talk of a rate cut as early as November.

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