Fed’s Monetary Policy Decision Drives Dollar Lower for Week

Some foreign currency markets moved in two directions last week, while others maintained their dominant trends. Overall, the U.S. Dollar finished lower for the week against a basket of currencies.

Despite greater demand for higher risk assets the latter half of the week, a group of commodity-linked currencies closed mixed with the Australian Dollar finishing the week higher and the New Zealand and Canadian Dollar losing ground.

As far as the funding currencies were concerned, both the Euro and Japanese Yen closed higher against the U.S. Dollar.

US Dollar

The U.S. Dollar closed lower for the week against a basket of currencies with the December U.S. Dollar Index futures contract settling lower at 95.392, down 0.613 or -0.64%. The index was primarily driven lower by the Fed’s decision to leave interest rates unchanged in September. Although the central bank hinted that a rate hike was likely in December, it said this would depend on the strength of the labor market. At the end of the week, traders had priced the chances of a Fed rate hike at 50%. Finally, the Fed provided further problems for bullish dollar investors when it lowered the outlook for the economy while reducing the number of future interest rate hikes.

Japanese Yen

The Japanese Yen had a two-sided reaction to the Bank of Japan’s decision to overhaul its monetary policy. At the end of the day, however, the Japanese Yen strengthened because investors felt the BOJ’s decision was too soft to improve the economy. The BOJ decided to go after the yield curve in this decision, which served as proof that its negative interest rate strategy was not working since it held rates steady. When the dust finally settled after a volatile reaction, traders decided that the new plan helps banks maintain profitability, but also indicates the central bank may be out of ideas to stimulate the economy. The USD/JPY closed the week at 100.971, down 1.285 or -1.26%.

Australian Dollar

The Australian Dollar had a good week with the AUD/USD finishing at .7621, up 0.0131 or +1.74%. The Aussie was initially supported by the Reserve Bank of Australia minutes which showed the central bank is comfortable with the economy and not likely to raise interest rates over the near-term.

The Forex pair was supported by greater demand for higher-yielding assets when the U.S. Federal Reserve’s monetary policy statement set off a rally in global equity markets as it failed to convince traders that the Fed would begin to raise rates on a gradual basis.

New Zealand Dollar

The Reserve Bank of New Zealand’s monetary policy statement pressured the New Zealand Dollar because it said that it would likely have to cut interest rates again. Traders are now pricing in a rate cut in November. The strength of the New Zealand Dollar is hurting exports and the central bank has to take action to change this or it will lose the economy. The NZD/USD finished the week at .7241, down 0.0023 or -0.33%.