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Dollar Problems: Is the Fed's Current Rhetoric Bad or Good?

Dollar Problems: Is the Fed's Current Rhetoric Bad or Good?

Many copies have been broken about the existing monetary policy of the Federal Reserve and its impact on the dynamics of the USD. Experts believe that the current Fed strategy is contributing to the weakening of the greenback, which has been going on for a long time.

Meanwhile, some analysts believe that maintaining a soft monetary policy can support the dollar in the long term. The dovish comments of Fed Chair Jerome Powell are an important support in this matter. However, the current situation is not in favor of the USD. On Thursday, February 25, the greenback sank to three-year lows amid Powell's statements. Recall that the regulator refrained from adjusting monetary policy until there are signs of improvement in the US economy. Powell stressed that the central bank will keep its finger on the pulse so as not to miss even a short-term surge in inflation.

The dovish statements of the regulator caused a wave of reflationary sentiment in the market. According to Trading Economics analysts, Powell's comments, along with expectations of large-scale budget spending, led to an increase in demand for risky assets. This "spurred" the EUR/USD pair, which on Thursday, gained 0.12% to 1.2178. As a result, the tandem reached a one and a half month high, trying to catch up. These efforts have been crowned with success: the EUR/USD pair is currently trading near a new important level of 1.2216-1.2217.

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Dollar Problems: Is the Fed's Current Rhetoric Bad or Good?

On Thursday, the market's focus is on the expectation of revised data on changes in US GDP for the fourth quarter of 2020. Also, reports on orders for durable goods for January 2021, information on initial applications for unemployment benefits in the US, and pending home sales will be released. According to analysts, the disappointing data may further weaken the already sagging dollar.

The impact of the Fed's current monetary policy on the greenback dynamics is difficult to overestimate. Experts believe that it is more likely to have a negative sign than a positive sign. The destabilization of the US economy contributes to the dollar "swing", which is more often inclined towards the deterioration.

Earlier, Powell drew attention to the uneven recovery of the US economy. Experts emphasized that such distortions may harm the national currency. The head of the Federal Reserve recalled that without a significant improvement in the US economy, the central bank will not adjust the monetary policy. The regulator considers the restoration of employment to be the main criterion for improvement. There are also difficulties concerning inflation: in the event of a short-term rise, the Fed will not increase the rate. Changes are only possible when the inflation rate exceeds 2%. According to the Fed's forecasts, this will take more than three years.

The tense situation on world markets is also making adjustments to the dynamics of the greenback. Investors are opting for reflationary trading amid expectations for US fiscal stimulus and accelerated COVID-19 vaccinations, betting on growth in economic activity in the near future.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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