Fed’s Exit Plan Fails to Excite Dollar Bulls

The U.S. Dollar erased earlier losses after the Federal Reserve released its monetary policy statement.

The U.S. Dollar erased earlier losses after the Federal Reserve released its monetary policy statement. The Dollar turned higher after trading most of the day lower after the Federal Open Market Committee offered more detailed plans to remove excess liquidity from the financial system.

The Fed also offered commentary on the economy, saying that deterioration in the labor market is “abating”. This statement is a reaction to the decline in the unemployment rate earlier in the month from 10.2% to 10.0%. The Fed did reiterate, however, that it will keep its benchmark interest rate at a historically low level for “an extended period”.

Bernanke and his friends also said “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth and tight credit.” This statement can be interpreted to mean the Fed still wants to see people getting jobs, consumers spending and banks lending money.

The EUR USD erased its earlier gain after the release of the FOMC statement. This move was short-lived causing a two-sided trade into the close. Technical issues could help support the Euro over the short-run, but investors are still monitoring sovereign debt issues in Spain, Portugal and Greece. Any new bearish developments regarding Euro Zone debt issues could pressure the Euro.

The GBP USD held on to its gains after the Fed released its monetary policy statement. The British Pound was buoyed this morning by a better than expected initial claims report.

Profit-taking and overbought technical conditions helped pressure the USD CHF most of the day. Shortly after the Fed announcement, the Swiss Franc weakened, but thin buying interest led to a quick turnaround.

The Fed news did very little to the USD CAD, which remains rangebound. The Canadian Dollar received most of its support the strong rallies in Gold and Crude Oil. Continue to look for a range bound trade.

The USD JPY remained rangebound although the Dollar strengthened versus the Yen after the Fed announcement. With the Fed outlining its exit strategy, Japanese interest rates are once again becoming the lowest in the world. This is helping the Dollar gain against the Yen.

The AUD USD broke through .9000 earlier in the trading session, but was quickly bought up by bottom-pickers. The weakness in the Aussie was triggered by a lower than expected 3rd Quarter growth rate. The decline in the economy is proof that the Reserve Bank of Australia has enough evidence to take a pause from hiking rates a third consecutive time in February.

The NZD USD weakened in sympathy with the Australian Dollar. A hike in U.S. rates will also tighten the interest rate differential between the U.S. and New Zealand, taking away some of the advantage the Kiwi enjoyed for over a year. Today’s Fed statement indicates that U.S. rates will rise before the Reserve Bank of New Zealand acts.