The Fed Sends the US Dollar Lower

The US Dollar dropped yesterday against all its major trading partners after the Federal Reserve Bank’s (Fed) policy statement. The dollar has hit a fresh new monthly low as the Fed took a more dovish stance than what was expected.

The Fed will keep policy as is, leaving the fed funds rate at near zero levels. In the opening statement we hear language that has been present for quite some time. “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

However, they did make some changes to its projections regarding the federal funds rate and the gross domestic product (GDP). The Fed is expecting slower growth as well as lower policy rates over the next 4 to 6 months. This caused investors to see more downside risk to the almighty buck.

This is the time to exit long USD positions, especially short to medium ones. This includes USD/JPY and maybe considering a short term long euro against the Dollar. Which is against my current long term bearish euro outlook and one that I passed on. This statement disappointed Forex traders as they were expecting a clear direction for a rate hike and there was no mention it would even happen by September.

This sent the Dollar lower in its basket against other Forex pairs.

Theory says that when a federal or central bank hikes rates a currency will climb as well. Why? Higher rates makes the underlying currency more valuable as well as profitable for investors to hold in their investment portfolios.  If risk-free rates in the United States become higher than the same rates seen in Europe, than holding Dollars if more profitable to holding euros.