U.S Dollar Takes Flight With Tapering In Motion

The safe-haven currency was up in London on Thursday morning. The U.S Dollar Index, which tracks the strength of the greenback against a basket of other currencies, rose by 160 basis points to trade at 94 index points.

As of this month, the U.S Federal Reserve will taper its monthly bond purchases by USD 15 billion. The taper will end in 2022. Continuing to use the word “transitory” to describe inflation, the U.S central bank left interest rates unchanged. Many expected the word to be removed.

In his remarks, Powell said that this Fed meeting was more about quantitative easing than interest rates. However, he added that this is the last meeting for which the reasoning will hold. The focus will return to the Fed’s interest rate strategy and tactics during future Fed meetings.

Rate hikes in July 2022 are being priced a bit aggressively, but the exact timing will depend on signs of transitory inflation between now and then. It greatly depends on how long these shortages last. However, the pricing is roughly in line with what we saw going in.

Investors have been pushing back against central banks’ ability to wait for the ‘transitory’ period to emerge in the past two to three weeks. As a result of factors that central banks are unable to control, inflation is still higher than anyone expected. The Fed isn’t expecting to raise rates at this point, but they’ve put the pieces in place in case they need to do so.

While short rates have risen, long rates have remained relatively stable, since the belief is that if rate hikes are needed, they will be taken – they are already priced in, and the market has already done the heavy lifting. The Fed can work with it if it does not turn out to be transitory as they expect.