The U.S. dollar’s party was fun while it lasted, but now it is over. Officially.
On Wednesday, the Federal Reserve made several key announcements:
– Interest rates will remain in the target range of zero percent and 0.25 percent.
– There will not be any rate hikes until 2022.
– Unlimited quantitative easing is here to stay during and after the coronavirus pandemic.
– GDP and employment levels will rebound next year.
Ultimately, the Fed is dovish and is prepared to support the economy any way it can. Even if that means more money-printing.
Well, this did not help the greenback as the currency suffered a massive selloff.
The U.S. Dollar index, which measures the greenback against a basket of currencies, plunged as much as 0.6 percent to below the 96 mark. The index is officially in contraction territory after its monumental four percent surge this year.
How did this happen? Two things.
The first is that investors no longer need to seek shelter in safe-haven assets, like the U.S. dollar. So, as a result, they can pour into high-risk, high-reward currencies. This explains why many emerging market currencies, such as the South African rand and the Indian rupee are booming.
The second could be that traders fear a tidal wave of inflation with all this money-printing.
Either way, the 2020 dollar rally is over.
Here is the official June statement from the Federal Open Market Committee (FOMC):
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.
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