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Dollar Flat as Fed's Powell Lays Out Plan to Boost Inflation

The U.S. dollar was flat Thursday, shrugging off a surge in U.S. treasury yields after Federal Reserve Chairman Jerome Powell laid out the central bank's plan to boost inflation and strengthen the recovery. 

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was flat at 92.99. The sluggish move in the greenback comes despite better-than-expected housing data and a surge in U.S. rates as the 10-year yield rose to a more than 24-month high.

Pending home sales, which measure signed contracts to purchase existing homes, increased 5.9% in last month from the prior month, according to the National Association of Realtors.

In a speech, Powell delivered an update on the bank's monetary policy framework review that would allow a more flexible approach to target inflation and allow labor market to run hot as the central bank seeks to adopt policy strategies to ensure a robust economic recovery. 

Under the proposed tweaks, "employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation," Powell said. On the inflation front, the Fed will use "appropriate monetary policy" to a achieve inflation moderately above 2 percent for some time."

The proposed changes, barring the move to let the labor market run out, were largely expected, and likely suggests the Federal Reserve will continue keep rates lower for longer to avoid a previous policy misstep of hiking rates too soon. 

"The Fed now obviously judges that it hiked rates too soon and too quickly after 2015, which was a root cause for the persistent undershooting of the inflation objective. To rectify this policy error, the Fed adopts a strategy better suited to a low inflation/low growth/low yield environment," Commerzbank (DE:CBKG) said.

After falling sharply since March, the dollar recently has showed signs of stabilizing as the surge in Covid-19 cases across the U.S. appears appears to be abating. The rebound in the greenback may persist as the threat of a second wave of the virus in other countries, which will hurt economic growth, remains likely.

"The economic figures for June and July reflect the significant positive impact of a number of public health restrictions being lifted. However, the situation hasn’t fully returned to normal, and several industries are still struggling to make up for lost ground. What’s more, the risk of a second wave of COVID-19 in the fall still appears realistic without a vaccine or an effective treatment. Under these circumstances, investors could be more cautious in the coming months, which leads us to believe in a rebound of the U.S. dollar," Desjardins said.


Reference by: Yasin Ebrahim, Investing.com

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