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This week's volatile rebound in the dollar was triggered by rising market risk sentiment, which in turn was related to multiple factors, including virus mutation, poor vaccine distribution, Fed pessimism and a sharp fall in U.S. stocks. The next focus of this week's currency market is the US GDP data for the fourth quarter of last year, released later on Thursday. In addition, Johnson & Johnson will release vaccine trial data over the weekend, which may also be an important disturbance factor in the currency market.
Market risk sentiment heats up
The dollar rebounded this week, with gains mainly on Wednesday because of more news on the day. As of about 18: 00 Beijing time on Thursday, the US dollar index (90.6600, 0.1200, 0.13) was temporarily at 90.73 points, up 0.58 percent so far this week, almost pulling back last week's 0.64 percent decline.
Judging from the weekly combination, the dollar seems to be bottoming out, but there is no clear sign of a bottom. The main reason for the dollar's rise on Wednesday was rising risk sentiment, which in turn was related to factors such as repeated new crown outbreaks, virus mutation and poor vaccine distribution. U.S. stocks fell sharply on Wednesday, which clearly pushed up market risk sentiment further. The Fed's meeting on Wednesday hinted that it would tolerate more inflation, so market expectations for the economic outlook are further pessimistic.
After the announcement of the Fed's decision, the U.S. dollar index first fell and then rose. After the Fed Chairman Powell spoke at a press conference, the U.S. dollar continued to remain strong. However, there is no strong logical correlation between the dollar's rise and the Fed's movements, and the dollar's rise may be more due to rising risk aversion.
U.S. stocks fell sharply on Wednesday, and the U.S. "panic index" VIX rose sharply, which induced risk aversion and supported the dollar. The Dow plunged 2.05 percent on Wednesday, its biggest one-day drop since Oct. 28.
One of the important reasons for the decline in U.S. stocks was the showdown between U.S. stock institutions and retail investors. As a result, institutions fell behind and were then forced to throw stocks to raise funds.
There may be some things that will affect risk sentiment this week, one is that a number of important economic indicators will be announced in the United States, and the other is that Johnson & Johnson's vaccine trial data will be released. If these matters are optimistic, risk sentiment will naturally decline.
Fed cuts US economic forecast
The Federal Reserve ended its two-day interest rate meeting on Wednesday and unexpectedly announced that it would keep interest rates unchanged at near zero while keeping its monthly bond purchases of at least $120 billion.
In its policy statement, the Fed downgraded its economic outlook, one of the main reasons being the risk of delays in vaccination, which could easily lead to a setback in efforts to restart the U.S. economy. The Fed has pledged to maintain these initiatives to support the economy until the economy fully rebounds from a pandemic-induced recession.
Federal Reserve Chairman Powell later said at a press conference that consumer spending has slowed in recent months after an initial sharp rebound, especially in the service sector. Although the housing market has recovered and business investment has rebounded, the prospects for economic recovery remain highly uncertain, and inflation is expected to remain below 2% in the next 12 months. Powell also said that monetary policy has played a very important role in supporting the economy, and it is appropriate to keep interest rates at the current level until inflation is moderate above 2% for a period of time.
In terms of the quantitative easing policy, Powell said that the quantitative easing policy will continue until the economy "substantially makes further progress". So far, the reduction of the quantitative easing policy is not even worth discussing.
Asked whether the Fed was fueling a bubble, Powell noted that monetary policy was not the main driver of asset prices, that vaccines and fiscal measures had recently driven asset prices and that "the link between low interest rates and asset values is not as close as one might think". Powell also said that the Fed believes that the current situation is unlikely to cause sustained and problematic inflation.
Obviously, the Fed is not tight on inflation, which generally means that it is unlikely to withdraw from the easing policy. This originally had no obvious support for the U.S. dollar, but the market is therefore more pessimistic about the economic outlook, and these risk sentiments eventually make the U.S. dollar. Rising.
In fact, the dollar just fell a lot and needed a break. Financial markets often have temporary unexplained volatility, perhaps the simplest reason for falling too much and rising easily. It's just that the probability of such a rebound will be limited and it should be extremely difficult to reverse its channel-style downward characteristics. (Daily Economic News)