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Fed Has No Patience For Dollar Bulls

The US dollar is on the back foot to begin Thursday’s  North American trading session after a furious rally in the minutes following the most recent Federal Reserve policy meeting. Chairman Janet Yellen made it clear to world markets that although the US economy is continuing to improve, the Fed would push back any start date to hiking rates. World shares rose back towards record highs and the US dollar experienced a volatile afternoon as investors price in a later start and perhaps a slower pace to rising US interest rates in 2015.

Blaming the surging dollar, triggered in large part by more accommodative policies abroad, Ms. Yellen explained that the greenback’s strength is curbing already low US inflation while restraining growth by way of exports. As expected, the FOMC did remove a pledge to “patience” in its approach to tightening policy, which does raise the possibility of the first rate hike in almost ten years, although policy makers stressed that did not mean the Fed was in any rush. The dollar experienced a mixed reaction, first dropping but later surging into the close as EUR/USD rose almost 400 pips at one point. The greenback stabilized against most majors but when the dust had settled, the dollar was comfortably higher by a few percentage points.

Data wise, it was very quiet overnight as Asian and European markets digested the Fed’s decision. Commodity currencies, most notably the Australia and New Zealand dollars, have all given back much of yesterday’s gains as oil prices have come off a bit during the overnight sessions. The Swiss franc gained after the Swiss National Bank decided  it would not move interest rates deeper into negative territory. Conversely, the euro has come off a bit on news of the ECB’s latest TLTRO offering for March 19th. The central bank handed out €97.8 billion to EU financial institutions in the third round of the program designed to boost lending. As the European economy continues to improve – slowly – this take-up shows that banks are willing to secure longer-term cash to fund loans. News of this excess liquidity is still enough to nudge the EUR/USD rate lower, even in the wake of yesterday’s surprising Fed statement.

Turning to North America, one of the best performing currencies on Wednesday was the Canadian dollar. The USD/CAD rate, which had been above $1.28, crashed nearly 300 pips following the Fed’s decision. With economic data limited this week out of the Great White North, the Loonie has been trading at the greenback’s expense. Tomorrow, Canadian February inflation is released but reaction should be minimal unless there is a big miss of expectations at 0.50%. In the US, weekly jobless claims showed another strong result, as only 291k new Americans filed first time unemployment claims. Before the weekend, the Fed’s Tarullo, Lockhart and Evans will all address markets in various fashions. Expect headlines from each policy members’ speech to nudge markets one way or the other into this week’s close.

Further reading:

US jobless claims stand at 291K – USD slightly stronger

EUR/USD dips below 1.07 in post Fed hangover