The Bull Run that the US Dollar has been on of late has been fuelled by a number of factors: improved economic signals from the US economy; growing US employment levels; the fall of the oil price; weakness in some other economies (Eurozone, Japan), putting downwards pressure on their currencies (linked, in both cases with continued or new QE measures) and the belief that US rates will rise soon.
The idea that interest rates in the US will rise from their near zero level is interpreted as meaning that the Dollar will rise as funds flood in to bask in the glow of greater returns on Dollar holdings. Lots of betting people had their money on a rise, or an announcement of one, either in April or June (not quite sure why nobody fancied May…). However, any rise will be incremental, probably only 0.1% since inflation is running well below target, the recovery is steady, but hardly robust and a larger increase might dampen business expansion. So, this week’s meeting of the Federal Reserve was being more keenly anticipated than normal.
In the event, it was another “steady as she goes message” with continuing promises of caution and watchfulness from the Fed, but they did modify the language slightly. The word “patient” (about interest rate rises) was dropped from their forward guidance statement, providing a moveable feast for speculators – some saw it as heralding an interest rise, others think it kicks such a rise into the long grass and now expect rates to be held until September. To further muddy the waters, Federal Reserve Chairman, Janet Yellen noted: "Just because we removed the word patient from the statement doesn't mean we're going to be impatient”. She went on to expand on this position in a way to warm the cockles of any politician’s heart: "We can't provide certainty and shouldn't provide certainty because economic developments that will unfold are uncertain". Clear?
The Fed wants to see further enhancement in the US jobs situation before it will act on an interest rate increase. It noted that economic growth had “moderated somewhat” since January, underlining the fact that it believes an interest rate increase could stymie growth, at least in the short term. Predictably, US markets rallied on the news that “cheap” money would be around for a while longer and the Dollar fell back from recent gains.