The dollar continued its climb and extended its gains from the previous day after the Federal Reserve appeared more confident than the market expected on the US economy. The Fed decided to stop its monthly bond purchase program known as QE, as was widely expected. What was less expected was the relatively upbeat assessment of the US economy, as it said the “underutilization of labor resources is gradually diminishing”. The Fed did not appear particularly worried about the possibility of low inflation. The Fed stressed that it will closely follow economic developments and will keep interest rates near zero if projected inflation continues to run below 2%, while if the economy improves more rapidly, it could raise interest rates sooner. The 2 hawkish dissenters from the previous meeting joined the rest of their colleagues this time round, and there was only a lone dovish dissenter that believed that bond purchases should be continued with inflation expectations so low.
The US dollar staged a powerful rally, crossing above the 109 level against the yen at around 109.08 and driving euro / dollar below the 1.27 and then the 1.26 handles by trading at 1.2595. Stocks posted very modest losses.
In other news, the New Zealand dollar posted significant losses – partly as a result of the US dollar’s move and partly because of the Reserve Bank of New Zealand. In its statement the RBNZ said it would keep rates stable for now to provide for “a period of assessment”. A number of analysts do not expect the RBNZ to hike rates until well into 2015 or even 2016. The kiwi crushed from its 0.7977 high the previous day all the way down to 0.7769 before recovering to 0.7795.
Looking ahead, the advance estimate of the US GDP growth rate for the third quarter will be closely looked at. With respect to the Eurozone, some important news will come out of Germany such as unemployment and preliminary inflation numbers. Eurostat’s business and consumer confidence figures will also attract attention.