Dollar Up, Investors Continue to Feel Bite of Hawkish Fed Decision

© Reuters.

By Gina Lee

AiVIF.com – The dollar was up on Friday morning in Asia and is set for its best week in nearly nine months. Investors also continue to recalculate their strategies after the U.S. Federal Reserve’s hint of a sooner-than-expected asset tapering.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.02% to 91.888 by 1 AM ET (5 AM GMT).

The USD/JPY pair inched up 0.01% to 110.22. The Bank of Japan maintained its interest rate stable at -0.10%, as widely expected, when it handed down its own policy decision earlier in the day.

The AUD/USD pair edged down 0.19% to 0.7536 and the NZD/USD pair inched down 0.10% to 0.6991.

The USD/CNY pair inched down 0.01% to 6.4472 and the GBP/USD pair inched down 0.08% to 1.3908.

Investors continue to digest the implications of the Fd hinting at asset tempering and interest rate hikes earlier than expected in its policy decision handed down earlier in the week.

"The Fed sent a very crucial message, that the days of plentiful, abundant, unlimited liquidity are drawing to a close," Westpac head of FX strategy Richard Franulovich told Reuters.

"We can now see an end point to zero rates... and they've told us in very plain-speaking English that they've commenced the conversation on how to commence tapering. That signal has precipitated a dramatic position unwind, because dollar shorts were based on that unending liquidity tap from the Fed, and zero rates," he added.

The greenback soared above its 200-day moving average to hit a more than two-month high of 92.010 since the Fed decision. It is set for a 1.5% weekly gain, the largest since September 2020.

"The viciousness with which the dollar has bounced back, the impulsive nature of it, tells me that there's been a decisive shift for a lot of big, stale positions... this is a meaningful, decisive re-thinking in dollar prospects, just by the nature of the price action in the last couple of days,” said Franulovich.

Fed forecasts, also known as ‘dot plots’, showed that 13 of the 18-member policy board predicted interest rate hikes in 2023, compared with the previous six. Despite the plots being an inaccurate rates predictor, the sudden deviation caused shock waves throughout the market.

Investors also retreated from U.S. Treasuries, particularly five and 10-year tenors. However, the U.S. yield curve flattened during the previous session as some investors remained hopeful that the Fed’s more hawkish stance could avert hyperinflation.

"For us, the key takeaway... is the market's preconceived idea of a fixed timeline for tapering is the wrong way to think about it," RBC Capital Markets FX strategy global head Elsa Lignos told Reuters.

"Perhaps collectively we talked ourselves into the idea that the Fed is so keen to avoid a taper tantrum, that 'they'll be forced to follow the ‘market consensus’. The decision shows that is wrong… every meeting is now live for a taper discussion," she added.