The US dollar advanced against a basket of currencies Wednesday, as the Federal Reserve conveyed optimism that inflation would gradually reach its target in the medium-term despite pledging to be patient on raising interest rates.
The US dollar index – a weighted average of the greenback’s performance against a basket of six currencies – climbed 0.33 percent to 94.33. The index reached an intraday high of 94.46 in the hours leading up to the Federal Open Market Committee rate statement.
The Federal Reserve made no changes to monetary policy on Wednesday, pledging to remain patient about raising interest rates in the face of below-trend inflation.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,” the Federal Reserve outlined in its official rate statement.
The statement added, “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
Policymakers are confident that inflation will gradually return to target in the medium-term as the “transitory effects” of lower energy prices and labour market underutilization diminish. Energy prices have plunged nearly 60 percent since the summer, driving down inflationary pressures throughout the advanced industrialized world. This has prompted central banks in Canada, Switzerland and Singapore, among others, to ease monetary policy to stave off deflation and promote economic growth.
The Federal Reserve has maintained rock-bottom interest rates for more than six years, having only in October ended its record bond-buying program. According to experts, the Federal Reserve could begin lifting interest rates in the second half of the year. Analysts had previously forecast a rate hike to materialize by June.
Rate-hike speculation has fueled the US dollar over the past seven months. The US dollar index is trading at 12-year highs, having gained more than 17 percent year-over-year.
The dollar was trading higher against the euro on Wednesday, as the EUR/USD declined 0.67 percent to 1.1307. The pair is likely to face initial support at 1.1277 and resistance at 1.1359.
The greenback rose more than 100 pips against its Canadian counterpart, as the USD/CAD retook the critical 1.25 level. The pair consolidated at 1.2509 in the North American session. Initial support is likely found at 1.2425 and resistance at 1.2555.
The US dollar could receive a boost at the end of the week when the Commerce Department reports on fourth quarter GDP. The US economy is forecast to rise 3.3 percent annually in the fourth quarter, following a 5 percent gain in the July to September period.
Based out of Toronto, Canada, Husni Sam Borji is senior macroeconomics analysts who contributes regularly to TradersDNA, where he examines the global financial markets. Husni Sam has authored dozens of government reports and industry whitepapers, as well as thousands of financial articles. Husni Sam holds a BA from the University of Windsor and a Master’s degree in Economic Public Policy from McMaster University.
His expertise includes macroeconomics, fundamental analysis, industry research and global political economy.