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US Dollar Displays Signs of Weakness After Powell's Mixed Comments

US Dollar Displays Signs of Weakness After Powell’s Mixed Comments

Posted Wednesday, January 12, 2022 by
Aiswarya Gopan • 2 min read

The US dollar has turned bearish and dropped to the lowest levels seen in nearly two months against its key rivals a day after Fed Chair Powell hinted that it could take longer for the central bank to take a call on taking steps to reduce its balance sheet. At the time of writing, the US dollar index DXY is trading at around 95.65.

On Tuesday, Powell testified before a Senate committee on his renomination as the Chairman of the US Federal Reserve, where he admitted that the US economy looked primed for rate hikes and QT measures, which were supportive for the greenback. However, the mood soon turned bearish when he spoked about how Fed officials remained undecided about how to tackle its assets worth nearly $9 trillion and could take at least three or four meetings to figure out how to resolve this.

These remarks made markets worry that the Fed could withdraw monetary stimulus quickly, even when uncertainties due to the labor market and the Omicron variant persist. In addition, Powell did not give any hint about a possible timeline by when the Fed could start implementing rate hikes going forward, denting some optimism towards the US dollar.

Earlier this week, Atlanta Fed President Raphael Bostic had also alluded to the possibility of a rapid rundown of the US central bank’s asset holdings as a result of strong inflation and a rapid rebound in the US economy. He did, however, add that he expected at least three rate hikes starting as soon as March to combat strong inflation.

Later today, the market will focus on the release of the US consumer prices figures for a better idea of when the Fed could announce its first rate hike since the COVID-19 pandemic started. Expectations are for the CPI to soar to 7% YoY, which could further bolster rate hike hopes.

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