The dollar extended gains on Thursday following the U.S. Federal Reserve signal on Wednesday that it would end emergency bond-buying and raise interest rates sooner than expected.
On Wednesday dollar registered its largest daily gain since March 2020, it extended gains as European markets opened.
Fed officials said that the COVID-19 pandemic was no longer a core constraint on U.S. commerce. However, it said in a statement that policy would be kept supportive for now to encourage the recovery of the labour market.
Fed projected an accelerated timetable for rate increases, and began talks on how to end the emergency bond-buying.
U.S. Treasury yields rose by the most since early March, while equities fell. Dow Jones closed 0.77% down on Wednesday at 34,033.67, while S & P 500 and Nasdaq closed down 0.54% and 0.24% respectively at 4,223.70 and 14,039.68.
At 0720 GMT, the dollar index was up 0.2% on the day at 91.613, its highest in two months. The euro dropped versus the dollar, with euro-dollar changing hands at a two-month low of $1.1951 according to Reuters.
“We think USD will hold on to its gains,” Elsa Lignos, global head of FX strategy at RBC Capital Markets, wrote in a note to clients. Adding that “some further positive data surprises,” are needed to build on those gains.
Deutsche Bank strategists said they were closing their long euro-versus-dollar trade recommendation, which was based on the Fed being dovish.
“One thing is clear: the Fed is no longer willing to push back on market pricing nor is it as committed to its transitory inflation narrative,” the bank said in a note to clients.
“We see the combined effects as dollar bullish: there is greater scope for a front-end real rate repricing in the US yield curve rather than just breakevens, as well as room for higher volatility.”
The pound and Canadian dollar – which had benefited from the expectation that their respective central banks would tighten policy more quickly than the Fed – lost out. Both fell to a six-week low versus the U.S. dollar .
But the Kiwi dollar strengthened after data showed New Zealand’s economy grew much faster than expected in the first quarter. At 0726 GMT, it was up 0.3% on the day at $0.70645.
Ifunanya Ikueze is an Engineer, Safety Professional, Writer, Investor, Entrepreneur and Educator.