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Dollar Holds Gains Despite Fed Insisting Easy Monetary Policy Here to Stay

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·2-min read
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By Yasin Ebrahim

Invesitng.com – The dollar held gains on Wednesday, as the Federal Reserve left interest rates unchanged, and continued to downplay the potential of tapering its bond purchases sooner than expected.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.55% to 90.65 to remain close to its session high of 90.88.

The Federal Open Market Committee kept its benchmark rate in a range of 0% to 0.25% and maintained its $120 billion monthly pace of bond purchases.

"The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved," Federal Reserve Jerome Powell said.

The Fed chief also downplayed the risk the central bank could taper sooner than expected amid expectations for a post-pandemic pick up inflation.

The Fed will likely take a "wait and see approach" to a potential post-pandemic rise in inflation, which he expects would prove to be "transient," Powell said.

The muted reaction in the dollar to the Fed decision comes ahead of the fourth-quarter U.S. GDP slated for Thursday that could provide further direction for the world's reserve currency.

"The consensus for GDP is for a 4.1% annualized rise with the Atlanta Fed’s GDP Now suggesting a stronger 7.5% rise," National Australia Bank (OTC:NABZY) said. "Into 2021, Q1 growth is likely to be weak given renewed virus restrictions, but growth thereafter is expected to rebound sharply as the vaccine is rolled out and restrictions ease. "

The dollar was also helped by a fall in EUR/USD, which has a significant weighting in the dollar basket, on reports suggested markets are under estimating the odds of the European Central Bank cutting rates below zero.

Bloomberg cited an anonymous ECB official as saying that markets are underestimating the odds of a further cut to the -0.5% deposit rate.

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