US Dollar Weakens as Fed Maintains Dovish Stance
A day after the Fed’s latest monetary policy decision, the US dollar is exhibiting signs of weakness against other leading currencies after the central bank maintained that it will continue to remain dovish and keep interest rates low for the next couple of years. At the time of writing, the US dollar index DXY is trading around 91.58.
As was widely expected Fed chair Jerome Powell stuck to the dovish stance even though he sounded more optimistic about the prospects of economic recovery in the US. While Powell admitted that he expects a V-shaped recovery in the US economy this year, he also stuck with the Fed’s original outlook to maintain interest rates close to zero and hold monetary policy loose until employment and inflation return to pre-pandemic levels.
The Fed’s decision caused investors to sell-off the US dollar and turn towards riskier currencies instead, causing a loss of around 0.5% and driving the dollar index to a two-week low. The optimistic outlook about the US economy’s speedy recovery has also triggered a risk-on sentiment in financial markets and dented the safe haven appeal of the greenback.
The Fed expects the US GDP for the current year to come in at 6.5% – the strongest reading seen in nearly four decades, up from its previous estimate for a 4.2% reading instead. The US central bank also expects inflation to strengthen to 2.4% in 2021 but it could ease lower, closer to the 2% level in the coming years.
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