The dollar advanced against a basket of major currencies on late Wednesday, rising to a one-week high after the Fed’s rate-setting committee decided to set October as the starting date of unwinding their overloaded balance sheet, while they also agreed to keep interest rates unchanged as markets had projected. Likewise, the BOJ’s monetary decision early on Thursday matched expectations, with the central bank maintaining its monetary strategy steady. However, the BOJ’s monetary outcome had little impact on market actions.
In a widely expected move, the Fed policymakers agreed unanimously on late Wednesday to keep interest rates steady in a range of 1-1.25%, while the FOMC statement signaled another rate hike of 0.25 percentage points probably in December. Besides that, the Fed reiterated in its statement that the rates will likely rise in a gradual path with the so-called dot plot of interest-rate forecasts showing three-quarter rate hikes in 2018, as was also signaled in June’s meeting.
Regarding the withdrawal of quantitative easing, Fed officials voted unanimously to reduce the size of the $4.5 billion balance sheet next month, saying that $6 billion in Treasuries and $4 billion in mortgage-backed securities will be cut every month. The reductions in the holdings of the bonds are expected to rise every three months until they reach the amount of $30 billion and $20 billion respectively (for Treasuries and MBS).
Despite the financial damage from the recent powerful hurricanes, the Fed policymakers claimed that the negative impact from those storms will affect the country’s economic performance only in the short term. In the medium term though, they anticipate the economy to continue strengthening, with improvements in the labor market driving inflation towards the Fed’s 2% goal. Fed Chair Janet Yellen, commenting on inflation in her press conference after the two-day monetary meeting concluded said that the recent price slowdown was “mysterious”, while she added that if factors contributing to this slowdown are proven persistent, then the central bank will have to change its monetary strategy.
Following the FOMC statement, the dollar index surged by almost 1.20% to a one-week high of 92.46 before it slipped to 92.30 during the Asian session.
Dollar/yen hit a two-month high at 112.61, with markets showing a muted reaction to the BOJ’s monetary decision early on Thursday. The Japanese central bank kept its charge on excess reserves from other financial institutions at -0.1%, while it also maintained its yield target for 10-year government bonds at 0% with an eight to one vote. In addition, the BOJ expressed its optimism on economic performance in its monetary statement, suggesting that there was no need for additional stimulus as economic activities are expected to recover gradually and push inflation towards the central bank’s 2% target. However, the new member, Goushi Kataoka, seemed more dovish, arguing that the current policy was not sufficient to lift prices up to the target during 2019. In contrast, the BOJ’s Governor, Haruhiko Kuroda, said in his press conference after the release of the monetary statement that current monetary strategy is supporting inflation but adjustments to this are not excluded if they are needed to maintain price momentum.
In other currencies, the aussie sank by 1% to $0.7956, in the wake of the Fed decision as well as due to comments made by RBA Governor Philip Lowe. Lowe stated at a business event in Perth that inflation is unlikely to rise to 2.5% anytime soon, with interest rates remaining at low levels for some time. Moreover, commenting on the direction of interest rates, he said that rates “are more likely to go up than down”.
The kiwi dropped by 0.60% to $0.7309 ahead of the national elections on September 23 although GDP figures for the second quarter published early today came in as expected. Specifically, New Zealand’s output expanded by 0.8% q/q and by 2.5% y/y.
Regarding oil prices, WTI crude dropped by 0.24% on the day to $50.57 per barrel and Brent declined by 0.18% to $56.19 after the EIA weekly report indicated that US crude inventories during the past week rose more than expected.
Gold was down by 0.53% at $1,294.30 per ounce.