A recent announcement by the U.S. Federal Reserve surprised the world to the point where the dollar dropped significantly on Wednesday. The announcement stated that the Fed does not foresee any new rate hikes in 2019. However, while the announcement may have been quite disruptive, there are already signs of recovery, particularly in Asia.
The global and domestic growth was slowing, which caused the Fed to flag it as the benchmark rate — typically ranging from 2.25% to 2.50% — changed. This was when the central bank decided that the rate hikes should remain off the table for the rest of the current year, thus sending the US Dollar Index to lower against multiple currencies around the world.
The news shook the financial industry briefly, but, as mentioned, the index is already making signs of recovery. The losses are slowly being nullified as the index continues to grow by around 0.9% to 95.382.
In addition to the announcement, the Fed also gave a forecast for the future of economic growth and inflation. They stated that the global economic and financial development, as well as inflation pressures, have led the Committee to the conclusion that patience is the best course of action at this point, at least until it determines what adjustments to the fund’s rate target range is appropriate.
This statement came as a surprise as well, as it stands in contrast to the central bank’s stance from three months ago. Back then, the Fed predicted two interest rate hikes in 2019.
Meanwhile, Joseph Capurso, the CBA’s senior currency strategist, stated that the dollar upside would be limited due to the downgraded economic outlook in the US, as well as because the more caution is necessary at the moment. However, he added that it is questionable whether the USD will truly depreciate to a significant extent, considering that the economic growth outlooks remain soft not only in the US but in Europe, Australia, as well as parts of Asia, such as Japan and China.
The Brexit dilemma
The USD is also somewhat supported by the drop in the value of the pound due to fears that the UK might damage the EU if March 29th passes without a deal. In addition to this, the EU allegedly stated that it would agree to Brexit’s short delay only if the UK lawmakers support the withdrawal agreement of the UK Prime Minister Theresa May. Whether or not this will actually happen remains to be seen, although many are doubtful since May proposed her plan twice in the past, and was rejected both times.
She stated that she hopes there might be a way for the lawmakers to accept the deal she created during her negotiations with the EU. May believes that her deal is the best one that can be achieved, under the circumstances, and that she will continue to work on securing the support. However, she also pointed out that the furthest delay of Brexit she is willing to accept is the 30th of June.
Meanwhile, some of the USD trading pairs are still damaged by the drop of the dollar, such as the USD/CNY, which dropped to 6.6823 (0.1%). On the other hand, the AUD/USD pair grew by 0.4, reaching 0.7145 even after Australia’s jobless rate suddenly dropped to the lowest point since June 2011, according to new data.