By Peter Nurse
Investing.com - The dollar pushed higher in early European trade Thursday, after the Federal Reserve failed to deliver any suggestion of more monetary stimulus in the near term. However, further currency weakness looks likely further ahead.
At 2:50 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.4% at 93.450, while the EUR/USD dropped 0.4% at 1.1768, hitting a one-month low.
At its first policy meeting since introducing a more tolerant stance on inflation, the Fed pledged to keep rates near zero until at least the end of 2023. This was widely expected, but the central bank also lifted its growth forecast for 2020 to show a contraction of 3.7%, compared with an estimate for a 6.5% decline previously.
While growth expectations in 2021 and 2022 were revised lower to 4% and 3% from 5% and 3.5% respectively, this all still represents an upbeat assessment of the economic recovery. Particularly as the Fed also lifted its expectations for both employment and inflation.
That said, “there was nothing really in the FOMC statement or the projections to un-nerve the conviction view that reflationary Fed policy is a dollar negative,” wrote analysts at ING, in a research note.
“Key components to this summer’s dollar decline have been the sense of recovery (today’s Fed upgrades to 2020 GDP and employment forecasts help here) and ultra-low rates (unchanged policy Fed policy through 2023 also help) resulting in real yields deep in negative territory,” ING added.
Analysts at Nordea also argued that any boost to the dollar from this latest Fed statement will be a short-term phenomenon.
“A (much) weaker USD will be a focal point in the Fed’s fight for higher inflation. Not so much due to the directly imported inflationary impulse, but much more due to the easier financial conditions that follow,” wrote Nordea’s Andreas Steno Larsen, in a research note.
“If the Fed wants to be seen as credible in its fight for inflation, the USD simply needs to weaken from here.”
Elsewhere, GBP/USD fell 0.2% to 1.2943, but still well above this week’s lows after Prime Minister Boris Johnson moved to cut off a rebellion in his own party, giving parliament a say over the use of post-Brexit powers.
Focus is now on the Bank of England’s policy-setting meeting, due to conclude later Thursday. Market expectations are for no change, but the vote split and minutes of the meeting will be carefully studied for insight into the bank’s intentions going forward given the economic challenges the U.K. faces.
USD/JPY rose 0.1% to 104.99 after the Bank of Japan kept its key interest rate at -0.1% and left its asset purchases unchanged, as widely expected.
The bank did upgrade its economic assessment for the first time since the virus hit, saying the economy has started to pick up with activity resuming gradually.