A popular gauge for the U.S. dollar spiked after the Federal Reserve lifted interest rates by 25 basis points on Wednesday but soon slipped back into negative territory as the euphoria failed to stick.
The Fed is leading the pack of developed market central banks in terms of monetary policy normalization, and the interest rate differentials created by this dynamic have been a supportive backdrop for the greenback. Its key rate now sits in the range of 1.75% to 2%, following this seventh rate hike since December 2015. Now traders are turning their focus to Thursday’s policy update of the European Central Bank, during which it could announce the end of its quantitative easing program.
Should the ECB fail to do so, the widened rates differentials between the eurozone and the U.S. could propel the buck higher, market participants suggested — but only on Thursday.
“There was a knee-jerk movement in the dollar, but I don’t place too much value on that,” said Minh Trang, senior FX trader at Silicon Valley Bank. “It’s more important to look at what the update really said: GDP expectations were revised up, as were inflation and core inflation, and the ‘dot-plot’, while the unemployment rate was revised down. All this is dollar-positive.”