Dollar Climbs as Fed Loses Unanimity on Warranting Low Rates

Dollar surges across the board as FOMC members lost unanimity on keeping borrowing costs low. Fed left rates unchanged at 0-0.25% today and in the accompanying statement, it still said that rate "are likely to warrant exceptionally low levels of the federal funds rate for an extended period." However, one member disagreed to this stance. Hoenig voted against the policy action as he believed that "economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

Fed will continue the purchase of $1.25T of agency mortgage-backed securities and $175b of agency debts and will continue to "evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets."

Also, considering "improved functioning of financial markets", Fed will close four money markets support facilities on February 1. Liquidity swap arrangements with other central banks will also expire on the same day. Fed will also wind down its Term Auction Facility and hold the last auction on March 8. Nevertheless, Fed is "prepared to modify these plans if necessary to support financial stability and economic growth."

Dollar index is now pressing last week's high of 78.81. As noted before, recent rally from 74.19 is likely resuming and a decisive break of 78.81 will target 61.8% projection of 74.19 to 78.45 from 76.60 at 79.23 next. Nevertheless, break of 78.35 minor support will delay the bullish view and suggest that more consolidations would be seen first before rally resumption.