Dollar Holds Firm in Cautious Trading Ahead of Fed Reserve’s Policy Meeting

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The dollar gained on Monday as investors looked to the Federal Reserve’s policy meeting results for where U.S. interest rates are headed. Investors are looking for clues as to whether the Federal Reserve plans to tighten monetary policy.

At the Fed Reserve’s monetary policy meeting, policymakers are expected to forecast that the U.S. economy will show a growth in 2021 at its fastest rate in decades, with inflation rising and unemployment falling, but are less likely to make changes in their monetary policy.

The Fed is expected to maintain its stance as there is no sign of excess inflationary growth, and equities appear fine following last week’s concern with yields.

However, investors are worried that a roaring economic comeback, coupled with a $1.9 trillion pandemic relief package, COVID-19 vaccine rollout, and the newfound optimism surrounding global recovery from Covid-19, will cause prices to rise as they did in the 1970s.

Gains in the greenback occur amid a retreat in U.S. benchmark yields from their highest levels much ahead of the Federal Reserve’s meeting. The benchmark 10-year Treasury yield stood at 1.6320 percent on Monday, close to Friday’s highest 1.6420%.

Rising US yields have lifted the dollar 2% so far this year. This rise in the greenback is mainly attributed to widening interest rate differentials relative to other major bond markets.

Bond yields have been rising for the last two months. Rising bond yields will continue to focus minds before the Federal Reserve’s meeting, at which the policymakers are expected to strike an optimistic tone on the U.S. economy. 

The rise in the dollar was more noticeable compared to low-yielding currencies such as the British pound and the Euro. High-yielding currencies, on the other hand, fared relatively better.

During European afternoon trade, the dollar was up against the Euro, with EUR/USD shedding 0.43% to reach 1.3642

The greenback was little changed at 109.170 yen early in the Asian session on Monday, after rising to 109.365 overnight. The Bank Of Japan begins a two-day policy meeting on Thursday, along with an extensive policy review. As per the central bank’s governor, keeping long-term interest rates “stably low” was important.

The Australian dollar was down 0.1% at US$0.7747. The New Zealand dollar also was down 0.1% at US$0.7193.

Bitcoin, on the other hand, slithered down to around $54,782 on Monday, following its record rise of $61,781.83 on Saturday.

The Federal Open Market Committee holds eight regularly scheduled meetings every year, where the committee decides how to manage monetary policy.

After the upcoming meeting, FOMC will release a summary of economic projections, which will give people an idea of where economic growth and inflation are headed in the near future.