DXY Reverse Gains As Federal Reserve Dismisses Taper Talk

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The US dollar is plummeting following the Federal Reserve’s two-day policy meeting. Investor appetite for riskier assets surged after the US central bank revealed that it would not raise interest rates or tighten policy any time soon. With traders likely to push up stocks, will the buck erase its year-to-date gains?

On Wednesday, the Federal Open Market Committee (FOMC) finished its March meeting. The Fed left its benchmark rate at 0.25% and maintained the current pace of asset acquisitions. The other big development was that the Eccles Building upgraded its economic outlook and inflation expectations and reduced estimates for the unemployment rate.

This year, the gross domestic product is forecast to rise 6.5%, citing President Joe Biden’s $1.9 trillion America Rescue Plan Act and the coronavirus vaccine rollout. Officials project that the GDP growth rate will cool down to 2% next year and 2.1% in 2023. In the long-term, the Fed is calling for 2% annual GDP growth. It also anticipates inflation to hit 2.59% within the next five years.

Rate hike expectations are split. FOMC members either see a rate hike next year or 2023.

Overall, Fed Chair Jerome Powell does not think now is the time to start discussing policy tapering, and he does not believe inflation will be high enough to shift the institution’s policy objectives.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak.

Inflation continues to run below 2 percent. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

On the data front, mortgage applications declined 2.2% in the week ending March 12, and the 30-year mortgage rate picked up 0.02% to 3.28%. Building permits dropped 10.8% to 1.682 million in February. Housing starts cratered 10.3% to 1.421 million.

The US bond market was mixed, with the 10-year Treasury yield edging up 0.007% to 1.63%. The one-year bill slid 0.006% to 0.068%, while the 30-year bond jumped 0.034% to 2.425%.

The US Dollar Index, which measures the greenback against a basket of currencies, wiped out its gains on Wednesday. The DXY tumbled 0.41% to 91.40, from an opening of 91.86, after the FOMC meeting. Its YTD rally was pared to below 2%.

The USD/CAD currency pair dropped 0.21% to 1.242, from an opening of 1.2447, at 19:23 GMT on Wednesday. The EUR/USD advanced 0.53% to 1.1968, from an opening of 1.1904.

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