Forex Blog: Currency Trading News & Analysis.

May 5th 2005

Fed causes stir in currency markets

Earlier this week, the Federal Reserve raised interest rates for the ninth consecutive time, to a more neutral level of 3%. This came as no surprise to analysts, who had already priced this move into most securities. The real shock occurred two hours later, when the Fed issued a statement regarding an omission in its earlier testimony. Apparently, it had forgotten to include its belief that inflation remains ‘well-contained.’ Many analysts found this omission to be all too coincidental, arguing that the Fed used the omission to draw special attention to inflation. Despite its comments which hinted otherwise, the Fed is still clearly concerned about inflation, and will probably predicate future rate hikes solely on inflation expectations. On the other hand, many investors still believe the Fed is ‘behind the curve,’ and is not raising rates as a pace which mirrors the growth of the US economy. The Fed is in a bind, as it may try to cool off an economy that just doesn’t need any help cooling off.  Forbes online discusses the implications for currency markets:

The dollar initially rose on the rate hike news. But dollar gains were limited by investor frustration that the Fed statement did not provide bolder clues about the central bank’s intentions for future interest rate increases. "These currency moves are not huge because we are not seeing a huge change in the language," said a senior trader.

Read More: Dollar weakens after surprise FOMC statement change

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Posted by Adam Kritzer | in Politics & Policy, US Dollar | No Comments »

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