Fed decision run-down: 4 reasons why the Dollar dropped

The Federal Reserve left the interest rate unchanged as expected but made some tweaks to the statement.
An acknowledgment of slower growth and a hint that higher inflation may be tolerated stand out.
Profit-taking may have also played a significant role in the reaction.

Yohay Elam FXStreet

The Federal Reserve left the interest rate unchanged at 1.50% to 1.75% as widely expected. Markets took their time with reacting to the statement before the US Dollar dropped.

Why the Dollar dropped

1) Symmetric inflation: The word "symmetric" was added to the statement in referring to the inflation target. Markets see this is a hint that the Fed may allow inflation to run high for some time after it has run low for quite a while. Allowing higher inflation means not raising rates too fast.

2) Moderation: The Federal Reserve used to the word used by ECB President Mario Draghi to describe the slowdown. The economy is seen as growing at a moderate rate, and household spending has moderate since Q4.

3) Future now unknown: The Fed also removed the line saying that the outlook has improved. If the prospects are not better, there is no reason to accelerate raising rates.

4) Profit-taking: The last reason the US Dollar fell on the FOMC is the rise of the US Dollar beforehand. The greenback gained ground in the hours prior to the publication and in the past several weeks. This came hand in hand with rising bond yields. A more hawkish statement may have already been priced in, and profit taking makes a lot of sense after such solid moves.

All in all, the combination of some cautious words and profit-taking weighed on the US Dollar. What is next? The US economy continues outperforming other major economies on growth and inflation. A resumption of the rises may come after the dust from the May FOMC settles. And as always, markets will be data-dependent, and Friday's Non-Farm Payrolls report is of high importance.

More: EUR/USD approaches 1.2000 on steady Fed

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

AUD/USD bulls regain control above 0.6950 amid USD retreat

AUD/USD regains traction and extends the previous day's bounce from the weekly low, aiming for 0.7000 in Asia on Friday. The overnight pullback in US bond yields keeps the US Dollar below an 18-month high, which in turn offers some support to the pair. Meanwhile, hawkish RBA expectations also keep the major underpinned.

USD/JPY holds gains near 158.00 after Japan's weak Household Spending data

USD/JPY clings to gains around 158.00 after data showed on Friday that Japan's Household Spending fell for the ninth straight month, undermining the Japanese Yen. Meanwhile, the US Dollar remains depressed as the overnight fall in US bond yields counters a hawkish Fed and geopolitical uncertainties, could cap any downside in the pair.

Gold remains range-bound below $4,200

Gold has given up some ground after an initial bullish attempt to reach weekly highs, returning to below the $4,200 mark per troy ounce on Friday. The US Dollar’s strong upside momentum, combined with rising US Treasury yields across the curve, seems to keep further gains in the yellow metal under scrutiny.

Has Bitcoin really escaped the macro forces it was built to fight?

Over 17 years ago, Satoshi Nakamoto designed Bitcoin (BTC) on the back of a global financial crisis as an alternative to the global monetary system outside the control of central banks, governments and traditional intermediaries. This raises a key question: has Bitcoin really become independent of the macroeconomic forces it was built to challenge?

The Euro is not the sick man of Europe. France's bond market is

EUR/USD remains under pressure, near the 17-month low of 1.1161 reached on Monday. The pair has lost more than 7% since its yearly peak, as concerns over France's public finances increasingly weigh on the single currency. But behind the weakness of the Euro (EUR), the problem does not necessarily lie with the European economy as a whole.