FOMC Statement Strengthens Dollar – Hurts Yen Crosses

The FOMC Statement talked about a small recovery in the American economy. While the interest rate rate stayed unchanged, the Federal Reserve’s words about slowing the pace of buying treasuries sent the dollar shooting upwards. Note the tumbling Yen crosses that were highlighted here in Forex Crunch.

As expected, the Federal Open Markets Committee concluded its two-day meeting with a unanimous decision to keep interest rates unchanged, at a range between 0 to 0.25%. They also supplied a notion about the recovery of the economy. That was expected after the surprising fall in the unemployment rate on Friday.

The surprise was in the wording regarding the program to buy mortgage backed treasuries, or dollar printing if you wish. Note this key sentence from the statement (emphasis mine):

To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

Slowing the pace of spilling dollars means less dollars in the market. Less dollars in the market mean a stronger dollar.

And that’s the immediate response of the forex markets: EUR/USD, which has manged its way up during the day, tumbled down by 100 pips, from 1.4230 to 1.4130 at the time of writing. GBP/USD also fell by 100 pips, from 16550 to 1.6450. Dollar bulls rage!

And note the Japanese Yen: after an initial weakening against the dollar, the Yen is now appreciating against the dollar. USD/JPY is under 96.

So, the Dollar Yen correlation is seen here at its best. What I wrote yesterday, that the FOMC Statement is an opportunity to short the Yen crosses came to life. I’m glad to say I told you 🙂

GBP/JPY is 150 pips down, below 158. EUR/JPY is more than 100 pips down, under 136.

This trend could always ease or even turn around. Currently the road is open for the dollar bulls and especially for the Yen cross bears.