US Dollar Supported as Investors Wait For Fed's Confirmation on Asset Purchase Tapering

US Dollar Supported as Investors Wait For Fed’s Confirmation on Asset Purchase Tapering

Posted Wednesday, November 3, 2021 by
Aiswarya Gopan • 2 min read

The US dollar is enjoying support into Wednesday, close to the highest levels seen so far this year against leading currencies Euro and Japanese yen, as the Fed starts winding down its monthly asset purchase program. At the time of writing, the US dollar index DXY is trading around 94.05.

The greenback soared past the 94 level against its major peers as investors turn optimistic about the US central bank announcing its plans to start tapering asset purchases later today at the conclusion of the latest FOMC meeting. However, in addition to asset purchases, traders will also closely watch the Fed statement for any clues on when it could start hiking interest rates once again, especially as bond yields turn volatile over rising worries about inflation getting stronger in the US.

There is high optimism that the Fed could signal possible interest in advancing the first rate hike post-pandemic, especially after the RBA retreated from its original plans to wait till 2024 to hike rates again. However, the optimism about the RBA’s interest in turning hawkish failed to move the commodity currency AUD, which displayed signs of weakness after the central bank pushed back on aggressive pricing for hikes next year.

In recent sessions, the US dollar had traded under pressure despite the Fed signaling a reversal of its dovish stance from November as recent data releases and statements from officials raised the possibility of other central banks beating the Fed in monetary tightening. However, with inflation ticking higher, expectations are rising that the Fed may need to do more than just reverse its dovish stance and tighten its monetary policy to counter the steep increase in prices.

While today’s focus will be on the Fed statement, we can also expect more volatility in currency markets into Thursday once the BOE policy meeting concludes. Investors remain highly optimistic that the UK’s central bank could announce a rate hike, which could put some pressure on the US dollar even as it drives bullish moves in GBP/USD.

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