The US dollar notched up additional significant gains – particularly against the yen – during today’s Asian session as investors digested the outcome of the all-important Federal Reserve meeting the previous day.
The dollar made a new 6-year record against the yen as it climbed to as high as 108.85 and euro / dollar fell to a new 14-month low of 1.2834. The euro later rebounded to 1.2870, as in contrast to the yen, it is showing more resilience against the dollar’s advances lately. The 110-11 dollar / yen level could present an obstacle to the surging dollar as it represents the 2008 high. With respect to the euro, the market will focus on the uptake of the long-term money that the ECB is offering to banks today (TLTROs or Targeted Long-Term Refinancing Operation), with analysts expecting banks to borrow around 150 billion euros.
Back to the dollar and the Federal Reserve, Yellen and company kept the reference to “considerable time” of low interest rates after QE ends in their statement, but the Fed Governors raised their median forecast of where interest rates would finish in 2015 to 1.375% from 1.125%. In addition, Yellen said the Fed retained the flexibility to raise interest rates if conditions warranted it, which was interpreted as hawkish. The Fed also explained some of the tools they would use in removing the extra liquidity they have pumped from the markets.
The key message of the Fed was that it was trying to prepare markets by hinting at possible steps and future tightening for the day after QE, while at the same time trying not to upset sentiment and maintaining the reference to commitments like “considerable time” of low interest rates. It was a balancing act with some risk according to economists.
Finally, sterling lost ground against a resurgent dollar to trade around 1.6260 despite a new poll that showed the “no” vote gaining a little ground on “yes” (53-47 Survation poll) in Scotland. Therefore, it is possible that the bounce from the 1.6060 to 1.6300 has already partially discounted a “no” and if indeed the poll returns a “no” the subsequent relief rally will be smaller. If on the other hand there is a surprise “yes”, the reaction could be severe. The first results as well as exit polls from Scotland’s referendum are expected early in Friday’s Asian session.