U.S. Dollar to Retain Positive Trend Despite Fed’s Move

on January 26 2012 8:43 AM
US Dollar
US Dollar Rueters

The Federal Reserve's move to keep interest rates unchanged for a longer period than previously indicated has resulted in some downward pressure on the U.S. dollar, but the stress on the greenback seems to be temporary, as its safe haven status gets support from the deteriorating global economic conditions and continuing sovereign debt crisis in the eurozone.

The Fed Wednesday said that it intended to keep federal funds rate on hold until at least late 2014, shifting from its earlier stance of at least mid-2013.

With little in the way of U.S. interest-rate expectations built into markets to price in or out for the foreseeable future, we do not expect the Fed's new communication strategy to exert a durable impact on the U.S. dollar, said a note from the Standard Chartered.

Following more-than-expected dovish tone from the Fed, the dollar weakened against its major counterparts, with Australian dollar rallying to a three-month high against the greenback during the Asian trading session Thursday.

Besides, the Federal Open Market Committee (FOMC) expects that the U.S. economy will grow modestly in the coming quarters although there has been a significant improvement in the economic data recently.

This FOMC has reminded us that although the US economy is likely to outperform the eurozone this year, it may be too early to see signs of a strong recovery. Thus, the Fed will remain ultra-accommodative for a long time still, said the Societe Generale Cross Asset Research.

The euro rebounded sharply against the dollar, with EUR/USD threatening to revisit the highest levels reached in the month. However, the downtrend in the single currency seems to remain intact until the investors are convinced that the European leaders could find a sustainable solution to deal with the debt crisis in the eurozone.

The USD appears to have entered a corrective phase and we think this could extend for several weeks. The overall USD positive trend remains in place, however, and think the precarious global economic environment will fuel further gains in coming weeks, the Standard Chartered said.