Forex U.S. Review – Dollar falls, gold, Swiss and yen rise after Fed announcement

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The euro gained against the dollar after the Federal Reserve said it will keep interest rates low for at least two years, keeping the Fed fund rate at 0.25 percent into 2013. The main driver behind the euro gaining over the dollar is the interest differential, since the European Central Bank has increased their benchmark interest rate twice this year and is now at 1.5 percent. EURUSD rose to 1.4318 after the news from 1.4194 before the news.

 

Sterling jumped after the U.S. Fed fund rate decision, spiking to 1.6269 from 1.6207 before the announcement. Dollar weakened as investors realized the Fed offered no new monetary initiatives even though they acknowledged that U.S. economic growth was proving considerably weaker than expected. Based on this they kept interest rates at record lows, creating a slight differential between the British benchmark rate which is at 0.5 percent.

 

The Swiss franc hit new records against the dollar yet again for a third straight session after the FOMC statement did not provide any new initiatives to jump start the U.S. economy, and investors now fear the U.S. will slide into recession. Markets hoped for at least the FOMC implementing QE3 but there was no time frame for that, and the statement had a negative tone. USDCHF touched a record low of 0.7088. Meanwhile, ERUCHF also touched a new record low of 1.0094 after the Fed statement as risk sentiment ruled the markets again on fear of a global recession.

 

Yen continued to gain strength leading USDJPY to extend its decline to 76.68 as investors dumped the dollar after their hopes of the U.S. Fed coming up with some rescue plan did not happen. A dollar sell off ensued as investors turned to the perceived safe haven yen for fear of a U.S. and global recession coming.

 

After some volatile trading, the Canadian dollar eventually strengthened against the U.S. dollar after the U.S. Federal Reserve said it will keep its hefty monetary policy stimulus for at least another two years. USDCAD dropped as much as 176 pips from a high of 0.9953 immediately after the news then fell to 0.9779 by the close of the session. Much earlier in the session the loonie weakened to parity with the U.S. dollar for the first time since February.

 

Gold climbed yet to another historic high in New York trading to $1,779.52 early in the session then see sawed and fell before rebounding again to $1,777.07 after the U.S. Fed statement which was not as optimistic as was hoped for. Demand for the safe haven asset, which seems to be the only one at the moment, has surged today as investors flee from risk . The Fed has effectively announced that they see no chance of an economic turnaround in the next two years to warrant a rate hike. This may serve to reinforce fears over the economy rather to calm fears.