Market and economic wrap: dollar drops on minor tweaks to FOMC statement - Westpac

Analysts at Westpac's market and economic wrap noting the minor tweaks to the FOMC statement regarding inflation and tapering.

Key Quotes:

"Global market sentiment: Minor tweaks to the FOMC statement regarding inflation and tapering caused US interest rates and the US dollar to fall sharply.

Interest rates: US 10yr treasury yields fell from 2.34% to 2.28%, and 2yr yields fell from 1.39% to 1.35%. Fed fund futures yields slipped, pricing the chance of a December rate hike at around 42% (from 47% yesterday).

Currencies: Broad-based US dollar weakness was the main story overnight, the DXY index down 0.7% on the day in response to the FOMC. EUR rose from 1.1613 to 1.1740 – a three-year high. USD/JPY fell from 112.20 to 111.06. AUD recovered from its CPI disappointment and Lowe speech, bouncing off 0.7878 to 0.8014 – a two-year high. NZD rose from 0.7415 to 0.7529 – a two-year high. AUD/NZD consolidated yesterday’s slippage, between 1.0620 and 1.0665.

Economic Wrap:

The FOMC decision was, as expected, an on-hold one. The statement, too, was little changed, although markets made a microscopic analysis of any tweaks in the language.

The key changes singled out were (1) the elimination of the word "recently," referring to the decline in inflation, suggesting there's some concern the weakening will be more long lasting; and the the removal of the word "somewhat" from the phrase describing that inflation is "running somewhat below 2%"; and (2) regarding tapering. The FOMC said it expects to begin normalising the size of its balance sheet “relatively soon”, compared to “this year” in the previous statement. implicitly signalling the chances of a September rate hike are close to nil and deferring until December."