Sunday, 19 August, 2018

United States stocks fall, dollar climbs late after Fed statement

US Dollar Moves Near 4 Month High Today Strong outlook for the US economcy rising yields have boosted the US dollar
Elsie Buchanan | 06 May, 2018, 22:57

While the Federal Reserve is widely expected to keep the benchmark interest rate on hold at its policy meeting ending on Wednesday, it looks certain to raise borrowing costs next month, given signs of possible acceleration in the USA economy.

By adding "symmetric" to the inflation target, Fed officials might indicate that they would allow inflation to exceed the 2-percent goal somewhat, according to some analysts.

The Fed monetary policy statement also expressed confidence in its economic oulook, saying business activity had been expanding at a moderate rate and employment growth had averaged strongly in recent months.

In Wednesday's statement, Fed officials said that inflation had "moved close" to the central bank's annual 2 percent target. The Fed's decision to leave its benchmark overnight lending rate in a target range of between one.five percent and one.seven-five-percent was unanimous. Investors had all but ruled out another increase at this week's meeting.

"The market will have to get used to the fact that in order to prevent an economic overheating interest rates in the United States will continue to rise", Commerzbank analysts said, predicting that rate differentials between countries would have a greater bearing on currencies and could cement euro/ dollar around US$1.20. All eyes turn to the Fed's next meeting in June, when rates are set to go up.

U.S. stocks briefly moved higher after the Fed's announcement but gave up gains amid concerns about worsening trade relations between the United States and China.

The Dow Jones Industrial Average (NYSEARCA:DIA) fell 174.07 points, or 0.7%, to 23,924.98.

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However, another important reason for dollar strength, in past couple of days, is to do with subdued and somewhat weak economic data for the euro zone. Analysts expect another hike is coming at the next meeting in June. It added that risks to the outlook appear roughly balanced, removing a prior reference to "near-term risks".

The US central bank kept its key interest rate unchanged as expected on Wednesday and at the same time signaled policymakers were not overly concerned by the recent uptick in inflation.

But data released on Monday showed price gains are now effectively at the Fed's target.

Since the Fed began raising rates in December 2015, the pace has been modest and gradual: One quarter-point rate increase in 2015, one in 2016, three in 2017 and one so far this year.

When the Fed announced its most recent rate increase in March, it forecast that it would raise rates twice more this year.

Friday's labor market report is expected to show that job growth rebounded last month after a disappointing payroll gain of 103,000 in March. Likewise, the Japanese economy had enjoyed eight straight quarters of expansion, the longest such run since the 1980s. As the impact of the tax reform takes hold in the economy, it may yet result in a higher "neutral" federal funds rate (the rate at which monetary policy is no longer pushing the economy forward, but is also not a restraint on growth) and quicken the pace at which the Fed gets to neutral.

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