No Tightening from Fed in Near Future, USD Loses to GBP & JPY

The US dollar fell against the Great Britain pound and the Japanese yen today as US policy makers continue to attempt downplay expectations of an interest rate hike among traders, investors and other market participants. At the same time, the greenback gained on the euro and commodity currencies.

Federal Reserve Bank of New York President William Dudley was speaking at the New York Association of Business Economics today. Regarding monetary policy of the US central bank, he said that it is likely to remain the same in the near future:

Over the near-term, if circumstances evolve relatively close to my forecast, I would continue to favor gradually reducing the pace of asset purchases by staying on the same glide path of a $10 billion reduction in the monthly purchase pace following each FOMC meeting.

He reminded that an end to asset purchases and a rate hike is not the same thing and a long period of time may pass between the former and the latter:

We currently anticipate that a considerable period of time will elapse between the end of asset purchases and lift-off, but precisely how long is difficult to say given the inherent uncertainties surrounding the outlook.

Dudley also explained that monetary tightening will likely not be fast:

My current thinking is that the pace of tightening will probably be relatively slow.

It looks like Fed members want to make it clear to the market that it is not reasonable to wait for higher interest rate soon. One might draw a parallel between the behavior of the dollar and the performance of the sterling as both currencies were lifted by speculations about monetary tightening, and both lost strength as it became clear that tightening is not going to happen anytime soon. Of course, the UK currency was hurt more (though it rallied today against the US currency), while the greenback waits for tomorrow’s minutes of the Fed policy meeting.

EUR/USD declined from 1.3708 to 1.3698 as of 18:49 GMT today, while its intraday low was at 1.3677. At the same time, GBP/USD rallied from 1.6812 to 1.6838, and USD/JPY dropped from 101.48 to 101.26.

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