Dollar Whipsaws Traders as Post-Fed Rally Proves Short-Lived

How Investors Should Read the Fed Statement
  • Statement's nod to improving global markets fuels initial jump
  • Market now focused on BoJ and forecasts for further stimulus

The dollar surged, then quickly pared gains Wednesday, after the Federal Reserve kept interest rates unchanged and failed to convince currency traders that any monetary tightening was around the corner.

The U.S. currency traded in a narrow range against most currencies after the central delivered its April policy statement. Investors were weighing a Fed policy statement that signaled reduced central-bank worry over global headwinds along with concern that the domestic economy is slowing.

Currency traders are now looking to the Bank of Japan meeting Thursday for policy moves that may inject market volatility. Bloomberg reported last week the authority may consider offering a negative rate on some loans. Twenty-three of 41 analysts surveyed expect policy makers will expand stimulus.

"That’s the perfect central-bank statement -- no change, no reaction, so that is perfection from the Fed’s point of view, well-choreographed," said Geoff Yu, an ultra-high-net-worth strategist in the chief investment office at UBS Wealth Management, which oversees the investment strategy for $2 trillion in assets. "Until new information comes in, the focus is going to be on the rest of the world."

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 counterparts, was little changed as of 5 p.m. in New York, after gaining as much as 0.4 percent. The U.S. currency added 0.1 percent to 111.46 yen, while dropping 0.2 percent to $1.1322 per euro.

After a two-year, 20 percent rally, the greenback has declined 4.4 percent this year on speculation the central bank will be less aggressive tightening monetary policy than currency traders expected. That dimmed the outlook for policy divergence compared with central banks overseas.

Fed Policy

Fed policy makers held their interest-rate target unchanged for the third straight meeting since they kicked off a tightening cycle in December. The statement suggested they remain optimistic about U.S. economic growth and are less concerned about risks posed by global economic weakness.

"Even though the statement was somewhat more upbeat, it does not provide clear signals on whether the Fed do another hike in June," said Sireen Harajli, a foreign exchange strategist at Mizuho Bank Ltd. in New York. That’s caused the dollar to erase its earlier gain, she said.

Hedge funds and other large speculators swung to betting on dollar weakness as of April 19 for the first time in almost two years. Positions that benefit from losses by the U.S. currency exceeded those that benefit from from a rally by a net 21,567 contracts, a report from the Commodity Futures Trading Commission showed. That’s the first time since July 2014 that the data haven’t shown net long positions for the dollar versus eight other major currencies.

The dollar is forecast to strengthen to $1.10 per euro and 113 yen by mid-year, according to the median estimates in Bloomberg surveys of analysts.

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