Dollar Up, Holds Near Multi-Month Highs as Shock From Fed Policy Decision Continue

© Reuters.

By Gina Lee

AiVIF.com – The dollar was up on Monday morning in Asia, holding near multi-month highs. Investors continue to reel from a hawkish U.S. Federal Reserve policy decision that took the market by surprise during the previous week.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.08% to 91.287 by 1:10 M ET (5:10 AM GMT). The index gained 1.9% during the previous week in its biggest rise since March 2020.

The USD/JPY pair was down 0.32% to 109.84.

The AUD/USD pair edged up 0.14% to 0.7488 and the NZD/USD pair was up 0.29% to 0.6953.

The USD/CNY pair was up 0.25% to 6.4689 while the GBP/USD pair inched down 0.07% to 1.3798.

The euro stood at $1.1872, after hitting a two-and-a-half-month low of $1.1847 on Friday.

The Fed’s latest decision, handed down during the previous week, hinted that interest rate hikes and asset tapering could begin sooner than expected. Of the 18-person Fed policy board, 13 predicted that interest rates would rise in 2023 versus six previously.

"Like many, I had expected the 61.8 Fibonacci retracement in the dollar index to hold for a bit ... and at least see some consolidation," Pepperstone Markets Ltd. head of research Chris Weston told Reuters.

"That wasn't to be, and it seems technical resistance means very little when this type of re-positioning event plays out,” he added.

Also hitting investors’ risk appetite were comments from St. Louis Federal Reserve President James Bullard on Friday that said the Fed's shift toward a faster asset tapering was a "natural" response to the recent economic recovery from COVID-19 as well as inflation moving quicker than expected.

"The Fed's latest dot plot was a meaningful surprise. In a scenario where markets continue to move Fed pricing in a hawkish direction, we could envision the euro/dollar falling an additional 2% if European rates remain about unchanged," Goldman Sachs (NYSE:GS) analysts said in a note.

But the note also said a sustained dollar is not expected either, as other central banks will need to consider policy normalization as their economies recover from COVID-19.

Dallas Fed President Robert Kaplan and New York Fed President John Williams (NYSE:WMB) will also speak throughout the week.

Meanwhile, the People’s Bank of China kept its loan prime rate steady at 3.85% earlier in the day and the Bank of England will hand down its own policy decision on Thursday. European Central Bank President Christine Lagarde will also address the European Parliament later in the day.