Forex US Review – Dollar rises against counterparts after Fed statement

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EURUSD initially rose in the US session, lifted on upbeat sentiment that Greece will receive its next aid tranche following a second round of talks via conference call between Greece and the IMF-EU yesterday was said to be “productive” and made “good progress.” The EU said in a statement that a “full mission” will return to Athens next week to decide on the next aid tranche. However, the dollar jumped against the euro after the US Federal Reserve policy meeting statement said that “there are significant downside risks to the economic outlook, including strains in global financial markets.” “The Fed decided to extend the average maturity of its security holdings, announcing it intends to buy $400 billion in 6- to 30-year Treasuries by the end of June 2012”. Markets reacted by buying dollar on the news, as the Fed’s strategy to try to lower long term rates instead of introducing QE3 and instead of increasing the money supply is positive for the dollar. EURUSD plummeted from the session high of 1.3793 down to 1.3586.

GBPUSD initially trekked down to an eight month low following dovish Bank of England monetary meeting minutes and the bank saying it could expand QE (quantitative easing) as early as next month, which would result in weakening the British pound. Cable soon bounced off the low lifted by bargain hunters as well as traders squaring off positions ahead of the FOMC statement. Immediately following the Fed statement, the dollar jumped against the pound as the Fed opted not to reintroduce quantitative easing whereas the Bank of England will. GBPUSD fell from the session high of 1.5685 down to 1.5510.

The Canadian dollar dropped to its weakest level against its US counterpart since January after the Federal Reserve gave a downbeat assessment of the U.S. economy and introduced “Operation Twist” to help ramp up the economy. The US is Canada’s major trading partner so any down side risks to it affects Canada. Investors piled into the safety of the greenback as many believe that the measures announced by the Fed aren’t good enough to help the US economy. USDCAD jumped on the news to 1.0058 from an early US session low of 0.9934.

The Swiss franc weakened sharply following the Fed statement, with USDCHF jumping from a session low of 0.8884 to a high of 0.8986. EURCHF fell on risk aversion after the news, down to 1.2210 from a high of 1.2295.

USDJPY was range bound most of the session ahead of the FOMC statement as investors waited on the sidelines. Once the Fed statement was released, dollar jumped against the yen to 76.68 from 72.26.

Gold dropped to $1,778.55 from a session high of $1,814.85 in reaction to the dollar gaining strength following the Federal Reserve statement. Gold and dollar have an inverse relationship.