US dollar fell sharply in Friday trade after Federal Reserve’s Chairman Jerome Powell announced to hold interest rates at the current level and intentionally increase the inflation rate above the targeted 2% level to support the economic recovery.
Although the Fed’s stance was according to analysts’ expectations, this also means a drop in the ‘real’ bond yields or inflation-adjusted returns, which has been considered as the biggest factor behind the greenbacks retreat in the past few months.
The USD index is currently trading around 92.30 level, down 4% year to date, and represents the lowest level in the past twenty-seven months. The weaknesses in the US dollar are supported by trader’s concerns over US economic recovery and November elections. Trade war with China has also been impacting greenback’s value in the past few months.
Euro, on the other hand, looks strong against the US dollar. The reserve currency is likely to hit 1.20 level in the coming days according to market analysts.
“EUR/USD keeps knock knock knockin’ on 1.20s door but has so far failed in every attempt before getting (too) close. It is probably just a matter of time before it happens, but the ECB will have a clear interest in fighting it short-to-medium-term since the European inflation is yet way too fragile,” says Andreas Steno Larsen, chief FX strategist at Nordea Markets.
Euro has recently hit two months high against the US dollar. The stronger euro could also negatively impact Eurozone economic recovery as a stronger euro could pressure the region’s exports.
The British Pound also saw big gains against the US dollar last week. The GBP/USD pair soared because of weaknesses in the US dollar and better than expected British economic data. The market analysts expect more gains for the British Pound due to strong technical and fundamental signals.