Dollar Soars, Euro Plunges as Fed Hikes Discount Rate
The U.S. Dollar is mounting a strong rally late in the
trading session following news that the Fed is set to hike the discount rate 25
basis points to 75 basis points. While not actually beginning a tighter
monetary policy, a hike in the borrowing rate charged to member banks is a sign
that the Fed is getting ready to begin removing stimulus and raising other key
interest rates.The Dollar is rallying
because the rate hike tightens the interest rate differential between the U.S. and other
On Thursday, the Dollar had a volatile trading session
triggered by economic reports and rumors of intervention. The Greenback opened
higher, driven by spillover from Wednesdayâ€™s strong U.S. economic data. Early during
todayâ€™s session the Dollar got a boost from mixed economic news. The Producer
Price Index was higher than expected, but weekly jobless claims rose. This was
followed by a better than expected Leading Indicators report and Philadelphia Fed
Initially, these reports supported the Dollar but a recovery
in the equity markets encouraged speculators to demand more risk. This slowed
down the upside momentum in the Dollar as intra-day profit-takers took over.
The Greenback accelerated to the downside on unconfirmed
rumors that China and Russia were
buying the Euro. After a sharp break, conditions settled and the Dollar turned
positive once again. Later in the session, it was confirmed that Russia was
actively buying foreign currencies. The recent weakness in the Forex markets
has driven the Ruble to a 14-month high. Both Russia
and perhaps China
feel the need to protect their export markets by driving up foreign currencies.
News that the Fed is planning to hike the discount rate sent
the Euro sharply lower late in the trading session. The heavy selling pressure
took out the recent bottom at 1.3531 although it failed to accelerate to the
downside once this price was pierced.
The EUR USD had an extremely volatile morning session. Stronger
than expected U.S. economic
reports put pressure on the Euro early in the session, but speculation that China and Russia were buyers turned the Euro
around. Intra-day trailing stops were hit as the market rallied, turning the
Euro positive for the day. The rally was short-lived, however, as buyers failed
to support the market on the subsequent retracement. Although the Euro weakened
at the mid-session, it managed to maintain the low for the day at 1.3539.
The move by Russia
and most likely by China
could create volatile trading conditions. According to the recent CFTC
Commitment of Traders Report, over $8 billion of short positions are being
wagered against the Euro. Further interventions by these two countries could
create a classic battle between Russia,
and the short hedge funds.
The shorts want to see fresh money coming in so they can
initiate new positions. The buyers want to create fear to encourage the weaker
shorts cover their positions, thereby driving up the Euro. It will be interesting to see if China and Russia continue to support the Euro
on weakness especially since the current break is being driven by the Fedâ€™s
action. Nonetheless, intervention is out there and traders should be aware of
the volatility it can create.
The GBP USD finished sharply lower. U.K. economic
pressures continued to push the British Pound lower. Although there was a
slight short-covering rally mid-morning, the currency was never able to turn
positive. Expectations are for the Pound to continue to drift lower as fear
that the U.K. recovery is
falling far behind the U.S.
is encouraging traders to keep up the selling pressure. The weak close has this
market in a position to take out the recent bottom at 1.5534.The action by the Fed to raise the discount
rate is helping to put additional pressure on the Cable.
The USD JPY surged to the upside after it was reported the
Fed was set to hike the discount rate by 25 basis points. This move by the Fed
helped to increase the interest rate differential thereby making the Dollar a
more attractive investment. Overnight the Bank of Japan said it would refrain
from buying Japanese Bonds. This gave the Yen a slight boost until better than
economic reports gave investors strong reasons to sell the currency.
The hike in the U.S. discount rate sent commodities
lower, taking with them the Canadian Dollar. A surge in Canadian inflation
pressured the USD CAD overnight, but stronger than expected U.S. economic
data turned the market around. Lower gold prices and mixed crude oil results
also encouraged traders to sell the Canadian Dollar. The U.S. Dollar could
rally further if the hike in the discount rate causes stocks, gold and crude
oil to fall sharply.
The USD CHF rallied after the Fed hiked the discount rate
late in the trading session. This pair traded higher earlier in the session
after talk circulated that the Swiss National Bank had intervened once again.
The mid-morning short-covering rally in the Euro gave the Swiss Franc a boost,
but these gains were erased once the Euro turned lower for the session. The
move by the Fed tightened the interest rate differential between the two
countries, forcing investors to adjust their positions.
The commodity-linked AUD USD and NZD USD had a volatile,
two-sided trade this morning. Early strength in the Dollar pressured both the
Aussie and Kiwi, but mid-morning demand for higher risk assets turned these
pairs positive. A failure to follow-through to the upside and a strengthening Dollar
drove both pairs lower after the mid-session.
News that the Fed hiked the discount rate sent commodities
sharply lower, dragging with them the commodity-linked Australian Dollar and
New Zealand Dollar.Wednesdayâ€™s closing
price reversal in both of these markets signaled a top which was confirmed
today. The charts indicate the Aussie can break to .8806 and the Kiwi to .6942
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