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Riskier Currencies Rallied After the Fed Took a Dovish Path

Riskier currencies, which are more sensitive to the economic cycle, such as the New Zealand dollar and Norwegian crown, rallied on Wednesday. On the other hand, the U.S dollar struggled after U.S. Federal Reserve’s officials confirmed that tighter monetary policy was a distant possibility.

The greenback skyrocketed last week amidst the tumbling stocks. This resulted from the agency surprising global markets by hinting at much earlier rate hikes than traders previously expected.

However, policymakers softened their stance once more. This caused the dollar to plummet down to its lowest level in almost a week. New York Fed President John Williams and Chairman Powell announced that the economic recovery required more time before higher borrowing costs and any stimulus tapering are appropriate.

On Tuesday, Powell stated that the Fed would not raise interest rates pre-emptively because the policymakers fear the possible onset of inflation. He added that they would wait for evidence of actual inflation or other imbalances.

The Fed maintains its dovish views. However, Norway and New Zealand recently made the relatively hawkish comments, sending their currencies soaring by 0.3% each against the dollar.

Kenneth Broux, a strategist at Societe Generale in London, noted that high beta currencies have a fairly decent week thus far as the dust settled from the Federal Reserve a week ago.

Against a basket of the major currencies, the U.S. dollar traded flat at 91.772 on Wednesday. It remained near its lowest level since June 17 and almost a third below a two-month high hit last week.

 

How Did the Euro and Japanese Yen Fare? 

 

The Euro steadied today, trading below $1.1950. Still, the common currency was on track for a third consecutive day of gains. According to the PMI data, eurozone business growth reached its fastest pace in 15 years in June after the easing of more lockdown measures. This news boosted the Euro.

Meanwhile, the Japanese yen tumbled down on Wednesday. New data showed that factory activity expanded at the slowest pace in four months in June. Output shrunk fast as well, while some investors reported a pick up in yen-funded carry trades. All in all, the unit was trading at its weakest level in almost three months.

Gavekal strategists noted that the risk of U.S. monetary policy being normalized sooner rather than later would offer the greenback support in the coming days. However, it is unlikely to be the dominant factor in forex markets. They also mentioned relative growth differentials as a driving factor, along with neutral positioning on the greenback.

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