Currency Traders Take Pass on Fed Volatility as Policy Priced In

  • Greenback guage trades in narrowest range since June 2014 FOMC
  • Central bank says rate path depends on economy, global markets

Currency traders are hearing the Federal Reserve loud and clear. The central bank issued its first interest-rate decision since ending seven years of unprecedented stimulus and it prompted barely a quiver in foreign-exchange markets. 

The U.S. currency traded in its tightest range for a Fed-decision day since June 2014 versus a basket of 10 global counterparts after the central bank left rates unchanged, in line with forecasts. While policy makers said they were “closely monitoring global economic and financial developments,” officials reiterated that rate increases will depend on how the economy performs.

“They did a nice job in walking that fine line,” said Tom Kersting, head of Edward Jones & Co.’s fixed-income research department in St. Louis. “What the Fed did today was acknowledge, or reinforce, what the market and investors already knew: there is a fair amount of uncertainty.”

Financial markets have been gripped by volatility since the start of the year amid concern that an economic slowdown in China would stunt growth around the world. At the same time, the U.S. economy continues to show signs of strength, including the lowest unemployment rates since 2008, posing a dilemma for the central bank in balancing overseas risks with domestic pressures.

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 peers, added 0.1 percent as of 5 p.m. in New York, little changed from its level at 2 p.m. when the Fed released its statement. The measure fluctuated between 1,244.91 and 1,250.28 on Wednesday.

The euro gained 0.2 percent to $1.0893 while the yen slipped 0.2 percent to 118.68 per dollar.

Price Swings

Volatility has stalked investors in stocks, bonds and currencies this year, with measures of all three climbing to their highest since September. The Fed’s latest statement omitted a line from its previous one saying risks to the economic outlook were “balanced.”

“It does recognize some of the uncertainties and volatility that exist right now,” said Mike Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York. “It is balanced, but it is a little bit more on the dovish side if anything. The market reaction -- at least on the fixed-income side -- has been fairly muted.” The company’s fixed-income group had $153 billion under management as of Dec. 31.

Traders see a 19 percent likelihood that the central bank will lift rates in March, down from 29 percent before Wednesday’s decision, data compiled by Bloomberg show. The calculations are based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase.

Policy makers still expect to increase rates at a “gradual” pace and see this supporting moderate economic expansion and a stronger jobs market, they said in a statement Wednesday following a two-day meeting in Washington. A first reading of growth in the fourth quarter scheduled for Jan. 29 is likely to show the economy slowed to 0.8 percent, from 2 percent in the three months through September, according to the median forecast of 85 analysts surveyed by Bloomberg.

“We’ve had two years of the dollar dominating and if the Fed can’t deliver what’s priced in, it gets very difficult,” said Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets. “We’ll see worries ahead of that gross domestic product print."

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