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U.S. Dollar On Seismic Moves, Ahead Of Tapering

By:
Olumide Adesina
Updated: Nov 3, 2021, 02:21 UTC

The bond market has seen seismic moves in anticipation of a hike as early as next year, but traders are focused on clues about what that means for when rates rise

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As investors awaiting the Federal Reserve’s policy unwind, the safe-haven currency held within striking distance of the year’s peaks on the yen on Wednesday.

The dollar bought 113.94 yen against a peak of 114.69 in 2021 as traders stayed away from Asian markets ahead of the Fed’s meeting later in the day. Overnight, the dollar index gained to 94.12.

With this rate decision, the Fed is expected to reveal its intentions to begin tapering its asset purchases. The market had been anticipating this announcement in September.

Powell said despite inflation sticking above 5%, the bank has yet to see the ‘significant further progress’ it had hoped to see on the employment front.

The U.S Fed Chief had earlier disclosed that the bank is ready to announce tapering soon as long as the employment data doesn’t disappoint, and markets largely interpreted that as ‘November’.

A potential rate hike in 2022 has been highlighted in the Fed’s updated economic projections. After that, rates have continued to rise and are now expected to see another rate hike next year.

At this point, the expectation for a taper announcement seems to have been priced in, with the focus now moving on the Fed’s rate hike plans for next year and whether it will be necessary to ramp up rates faster to stem inflationary pressures.

The bond market has seen seismic moves in anticipation of a hike as early as next year, but traders are focused on clues about what that means for when rates rise.

Market movement is likely to be driven by traders’ perception of the relative pace of policy tightening, as well as by whether markets can hold onto the assumption that the Fed funds rate won’t go much higher than 1.75 percent.

As an economy that has been priced off zero nominal rates and dramatic negative real rates for 18 months, inflation is taking off.

While investors are expecting even faster hikes elsewhere in the world, the dollar has been held back so far, but risks loom if it begins to look like more rate hikes will be necessary to tamp down fast-rising prices.

“If the real economy actually remains resilient to rate hikes, and inflation is similarly stubborn, then the market’s forecast of a terminal funds rate of near 1.75 percent by the end of 2026 is way too low

About the Author

Olumide Adesina is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. He is a Member of the Chartered Financial Analyst Society.

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