The U.S. Dollar surged to a 5-year peak versus the safe haven Japanese Yen following the surprise news from the Federal Reserve that it would begin to scale back its quantitative easing scheme by cutting the monthly bond purchase by $10 billion, split equally between Treasuries and mortgage-back securities. At the same time, the Fed announcement said that overnight interest rates would continue to remain at their historical lows near zero at least until and likely beyond the point when the unemployment rate drops below 6.5%.
As reported at 10:18 a.m. (JST) in Tokyo, the USD/JPY pair rose to 104.37 Japanese Yen, a price last seen in October 2008; the 1.6% jump was the largest single day’s rally for the greenback in nearly five months. In the overnight trading hours in Asia, the EUR/USD fell 0.1% to $1.3669, which followed a 0.6% drop after yesterday’s announcement and made that the lowest price since early December. Currency analysts are continuing to recommend that market players short the EUR/USD pair in the short term.
Analysts Believe Fed Will Continue Tightening
Though the Fed didn’t come out directly and say this, market players are hopeful that the signal sent is indicative of a significantly improving economy, and leading many analysts, including those at Barclays, to speculate that the Fed might curtail the bond purchases at each and every one of its upcoming monthly meetings. For one FX director in Hong Kong, that is enough to suggest to clients that the time is right for the greenback’s return.