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18 Jun 2021
3 min read

Fed’s Expected Interest Rate Tweak Fuels a Dollar Rally

Fed’s Expected Interest Rate Tweak Fuels a Dollar Rally

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Key Takeaways

  • The US dollar shines across the currency board as investors rush into owning it
  • The greenback had its best two-day performance of the year after the Fed statement

The US dollar extended its stellar rally into a third straight session in early Friday as market participants are optimistic to rotate to the greenback as a response to the Federal Reserve’s shift in tone. On Friday, the dollar is trading higher against a basket of currencies, following the biggest two-day gain of the year.

The rally in the US currency was triggered after US central bank officials shortened the expected time before lifting the interest rate for the first time in the post-pandemic environment. The dollar index, which measures the dollar’s value against a basket of foreign currencies, surged 0.87% on Thursday, adding to Wednesday’s gains of nearly 0.6%.

The euro lost 2% against the dollar during the past three sessions, the biggest three-day slide in the pair since the pandemic-induced market crash in March 2020. Back then, for the period March 16 to March 18, the EUR/USD pair erased 4.39% of its value. So far in the year, the euro has never been profitable against the dollar as it kicked off the first trading week of 2021 with a high of $1.2349 and has been floating below that level since. The yearly low of the euro against the dollar arrived on March 31 when the eurozone currency slipped to $1.1704.

A Downturn For Other Currencies

Other currencies are also in a major downfall this week as the value of the dollar soars. The sterling is lower by nearly 2% against the dollar. The GBP/USD slid from Wednesday’s high of 1.4133 to today’s session low of 1.3855. The USD/CAD is in a buying frenzy for the past four sessions. The pair has advanced more than 2.1% since Tuesday. Similarly, the USD/CHF has been ascending over the past three days, gaining more than 2.4%.

The Federal Reserve said on Wednesday that the majority of Fed policymakers expected a rate hike in 2023. As recently as March, Fed Chair Jerome Powell reassured investors the US central bank does not even think about touching the interest rate at least until 2024. Bringing forward the rate increase, according to the Fed Chair, was needed due to the rapidly improving economy underpinned by vaccinations and the revival of social and business activity.

In addition to raising the interest rate, Jerome Powell said Fed officials have begun “talking about talking about” dialing back the Fed’s $120bn-a-month asset purchases, which have fueled a rally in the stock market since the pandemic swept the financial markets in March 2020.

Meanwhile, as traders and investors exchanged assets for dollars, gold suffered its worst two-day performance of the year. The precious metal lost about 5.20% of its worth, dropping from a Wednesday high of $1,864 to a Thursday low of $1,767. This year, gold has not yet been able to attract investors’ attention. The yellow metal started trading in 2021 hovering around $1,950 per troy ounce. Since the second week of the year, however, gold’s price has been pushed down to a low of $1,678 on March 31.

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