The FOMC meeting gave the dollar a big boost last night as the new Federal Reserve Janet Yellen made it clear that interest rate hikes can be expected in 2015 and probably the early part. Investors that have been debating over when the rate hikes will start are clearer now and so the knee-jerk reaction was to buy the dollar. Few currencies were safe as EURUSD, GBPUSD and AUDUSD all sold off and USDJPY spiked, with one of the most pronounced move coming against the Yen.
The dollar has had a mixed year so far starting strong as investors became used to the fact that the Fed was due to taper gradually throughout the year and possibly unwind their asset purchases totally before 2014 was out. We then saw a spate of poor economic numbers, especially jobs data which completely blew the wind out of the dollar’s sails. However, last night confirmed that the taper is unlikely to be tapered and the dollar strength that started earlier in the year could continue. This makes the recent strength in the Euro relatively vulnerable and the 1.4000 level is now looking a real challenge as EURUSD hits a two week low, currently at 1.3830.
We are unquestionably going to have to get used to a world of higher interest rates next year as the Bank of England and the Federal Reserve normalise monetary policy. Even the ECB has become less dovish after avoiding a widely expected rate cut at their last meeting.
Further reading:
Canadian dollar crushed post series of events
5 reasons for USD rally on the Fed decision
