Dollar drops after Fed inflation view

Yesterday, the Dollar licked its wounds at 13-month lows against a basket of major currencies after the Federal Reserve’s more cautious wording on the inflation outlook bolstered views it might not hike interest rates again this year.

While the Fed said it expected to start shrinking its massive holdings of Bonds “relatively soon”, a phrase taken by many to mean an announcement in September, the Central Bank also noted weakness in US inflation more explicitly than before. That recognition of soft inflation from the Fed, added to expectations that the Fed’s plan to raise interest rates a third time this year might be delayed. Although the Dollar has been supported by the Fed’s gradual policy tightening since late 2015, its perceived interest rate advantage is eroding as many other Central Banks have started to look to wind back their stimulus in recent months. The Dollar’s Index against a basket of six major currencies slumped to 13 -month low near 93.20.

Meanwhile, the Canadian Dollar hit its strongest level in more than two years against the greenback after language from the Federal Reserve’s policy statement, which was seen slightly more dovish than expected, sent the US currency lower.

But currency strategists have expressed skepticism the Canadian Dollar can rally much further, with expectations the Bank of Canada will raise interest rates one more time this year already fully priced into the market. The Canadian Dollar has soared 10% since early May on the back of a weaker US Dollar and robust economic data that spurred the Bank of Canada to raise interest rates, while higher Oil prices also supported the move.