Federal Reserve begins taper, dollar rallies

Tom Tong19/Dec/2013Currency Updates

The FOMC statement released today announced that the Federal Reserve will scale back its monthly purchases of Treasuries and mortgage-backed bonds by $10 billion, from $85bln to $75bln. At the post-meeting press conference, Chairman Bernanke suggested that absent major economic surprises, this pace of pace reduction would continue, i.e. the FOMC would reduce the amount of monthly purchases by $10 billion at each meeting. Consensus was about evenly split on the possibility of a taper announcement today; we had expected the Fed to wait until next meeting.

The Fed did reaffirm its commitment to 0% rates, independently of its asset purchase policy. It pushed back the timetable for any hike in rates to “well past the time” when unemployment drops below its 6.5% target. Further, it highlighted its concern over the fact that inflation continues to undershoot the 2% target. The revisions to the FOMC projections for inflation, unemployment and growth for the next two years were minor.

While there are arguments in the statement for both dollar bulls and dollar bears, Bernanke’s comments at the press conference suggesting a relatively sunny outlook of the US economy, ending up buoying the dollar. The relatively decent prospects for growth in the US, and the likelihood of continued reductions in monthly asset purchases in the meetings to come should support the dollar vs. other major currencies in 2014.

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Written by Tom Tong

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