US Dollar Weakens ahead of Fed Announcement

USD weekly outlook TradersDNA

The US dollar declined against a basket of currencies Wednesday, as investors prepared for the release of the Federal Reserve’s interest rate guidance amid global volatility that is making it more difficult for policymakers to justify future rate adjustments.

The dollar index, which is normally very sensitive to interest rate speculation, declined 0.6% on Wednesday after a mostly negative start to the week. However, unlike global stocks and bonds, the dollar has had a relatively muted start to the year.

The dollar lost ground to the euro on Wednesday, with the EUR/USD exchange rate remaining in a holding pattern ahead of the Fed. The pair climbed 0.3% to 1.0895 following back-to-back gains.

Elsewhere, the dollar was little changed against the yen and pound. The greenback drifted slightly lower against the Canadian dollar following a sharp five-day reversal trend.

Investors are becoming concerned that any resumption of gains for the dollar could add further pressure on global growth. Earlier this month the International Monetary Fund (IMF) downgraded its global growth outlook by 0.2 percentage point in 2016 and 2017, citing uneven global demand in emerging markets.

On Tuesday Markit Group said that US gross domestic product (GDP), the value of all goods and services produced in the economy, was on pace to grow jut 1.5% annually in the first quarter. A stronger dollar is making it more difficult for US multinationals to remain profitable, as evidenced by back-to-back quarters of profit declines on Wall Street. According to financial research firm FactSet, S&P 500 companies have so far reported a blended earnings decline of 6% in the fourth quarter of 2015. If that number holds it would mark the third consecutive quarter US corporations reported a decline in earnings.

American stock futures were trading lower ahead of Wednesday’s opening bell. US stocks attempted to stabilize on Tuesday, with the Dow Jones Industrial Average climbing 282 points or 1.8%.

Precious metals, which normally trade inversely with the dollar, were little changed on Wednesday after two consecutive daily advances. Gold for April delivery continued to hover around $1,120.50 per troy ounce, a three-month high on the Comex division of the New York Mercantile Exchange.

Global financial tumult has raised demand for gold and other safe haven assets. With Asian stocks resuming their sharp decline on Tuesday, investors are quickly cutting risks from their portfolio.