US Dollar Extends Post-FOMC Gains

The US Dollar Index rallied strongly after the Fed expressed confidence in the country’s economic rebound. The accompanying policy statement said the Fed would be “patient” in removing policy accommodation and loose monetary policy would likely remain in place until 2017, according to the Fed Chair. When asked to specify what “patience” meant, Janet Yellen said that rates would remain at zero at least for the next couple of meetings. That would put the earliest date for a rate hike at April of 2015, when the Fed holds its third meeting of the year.

The fact that the Fed and Yellen were confident about the US economy and that the Fed was on course to raise interest rates in a gradual way beginning next year, boosted the US dollar as well as risk assets such as stocks. The US benchmark the S&P 500 powered higher with a 2% up move for example. The Fed was apparently successful in preparing markets for higher interest rates while at the same time not spooking them as it also expressed confidence in US economic prospects.

The euro dropped from around 1.2418 to below 1.23 at 1.2296. The euro was targeting the 1.2246 2-year low it made on December 8. Similarly, the yen also retreated as USD/JPY climbed almost to the 119 level at 118.99. USD/JPY was last trading at 118.71. The pound retested its 15-month low around 1.5540 and the aussie made a fresh 4 ½ year low at 0.8106 – with the 81 cent level becoming the new focal point for the Australian vs US dollar pair.

In other news, the Swiss National Bank announced it was introducing negative rates of -0.25% for Swiss franc sight deposits held at the bank and widened its 3-month libor target range to -0.75% to 0.25%. EUR/CHF climbed away from the 1.20 floor to as high as 1.2095. It was last trading at 1.2083 in volatile trading.

Looking ahead, the market will react to the important IFO German business sentiment survey for December, as well as UK retail sales a little later. Next will be US jobless claims and business surveys such as preliminary Markit Services and the Philly Fed index. Tomorrow’s Asian session will see the final Bank of Japan meeting for 2014.