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US Dollar Recovers on Hawkish FOMC Statement

Tuesday, 07 August 2007 19:23:04 GMT  |  David Rodriguez, Currency Analyst

The US dollar continued yesterday’s strong reversal, trading considerably higher against most forex trading counterparts following the day’s FOMC interest rate announcement. A morning Labor Cost and Nonfarm Productivity report lent the currency firm support ahead of the afternoon’s Fed decision, with higher-than-expected wage inflation stabilizing outlook on domestic interest rates. The afternoon’s Fed announcement likewise served to boost the Greenback, as a marginally hawkish FOMC statement scaled back forecasts of interest rate cuts through year-end.

The Euro pulled back on the dollar’s advance, dropping nearly 40 points to $1.3754 through late afternoon trade. British pound traders kept the Cable on offer, slipping 70 points to $2.0227. The Japanese Yen was the only major currency to remain bid against the rebounding US dollar, with the USD dropping ¥0.80 to ¥118.10 Yen.

A relatively quiet day of early event risk kept the market primed for post-FOMC volatility, with choppy markets confirming the significance of the central bank announcement. The sole exception to the rule came on a Labor Cost report through the New York morning, which showed strong wage growth as a clear risk to outlook on moderating inflation. The results in the Labor data were enough to leave the dollar bid ahead of the later FOMC rate announcement, with a subsequently hawkish central bank statement further supporting the dollar’s cause. 

The Fed kept its overnight lending rate unchanged at 5.25 percent through the meeting, but a continued focus on inflation sent market yields significantly higher in the moments to follow. Markets traded within incredibly wide ranges following the release of the FOMC statement, but the final verdict showed that traders expect the Fed to leave rates stable through the medium term. Indeed, the December Eurodollar contract fell significantly through time of writing—leaving the implied market rate six basis points higher to 5.06 percent. Though this still shows a fair probability of a Fed interest rate cut through year-end, speculators clearly scaled back such forecasts in light of relatively hawkish central bank rhetoric. Such improved outlook on US interest rates pushed the dollar higher through the short term, and upward momentum in yields may keep the dollar bid through the upcoming trading week.

Stocks remained extraordinarily volatile through the day’s trade, flipping from positive to negative and vice versa several times ahead of the close. The Dow Jones Industrial Average added 62 points through time of writing, while the S&P 500 saw a larger percentage move at +11.28 to 1,478.95. The NASDAQ Composite likewise saw a bid, inching 11 points higher to 2,558 at time of writing. 

Fixed income markets likewise posted incredibly volatile moves before pulling back ahead of the US stock market close. The benchmark 10-Year Note lost 5/32 in price to leave yields 2 basis points higher at 4.75 percent. At the same time, the highly interest rate-sensitive 2-Year Treasury Yield added 4bp to 4.55 percent.

Written by David Rodriguez, Currency Analyst of DailyFX.com

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