Fed’s gloomy outlook steadies dollar slide, for now

(C) Reuters. A U.S. Dollar banknote

By Tom Westbrook

SINGAPORE (Reuters) – The dollar steadied against riskier currencies and the safe-haven yen hit a one-month high on Thursday, as the U.S. Federal Reserve’s dour economic outlook spooked investors.

The moves arrested the greenback’s initial slide after the Fed’s policy stance, projecting rates near zero for years, was even more accommodative than expected.

The Australian dollar retreated from an overnight 11-month high and fell as much as half a percent to $0.6966. The New Zealand dollar gave up a four-and-a-half month high and fell 0.3% to $0.6516.

The yen rose marginally to 106.90, its highest since mid May. Though the euro – which hit a three month peak overnight – held firm, pointing to the possibility of more downside to come for the dollar once the dust settles.

The single currency (EUR=) last bought $1.1382.

Fed policymakers projected the U.S. economy to shrink 6.5% this year and the unemployment rate to be 9.3% at year’s end.

“It is a long road,” Fed Chair Jerome Powell said via video link on Wednesday.

“We can use our tools to support the labour market and the economy, and we can use them until we fully recover,” he said.

That was a gloomier view than many in the market have gravitated towards in recent days and sent investors out of stocks, away from riskier currencies and in to bonds and the dollar.

“That’s been the follow-through, and it’s played into a broad rebound in the dollar,” said Rodrigo Catril, FX analyst at National Australia Bank (OTC:NABZY) in Sydney.

“But the takeaway is the Fed remains fully committed to its ultra easy monetary polices,” he said. “That should be supportive for risk assets, and on a structural basis we still think the U.S. dollar is embarking on a cyclical downturn.”

Neither Powell nor the Fed’s statement brooked any suggestion that the central bank’s massive liquidity injections would be waning any time soon, with the statement promising bond buying to continue “at least at the current pace”.

Powell also said the question remains open as to whether the Fed will use yield curve controls, reinforcing expectations that it is gearing up to do so and pressing benchmark 10-year yields back down under 0.8%.

Against a basket of currencies (=USD) the dollar was steady at 96.050, just above a three-month low hit on Tuesday. Sterling held at $1.2738, just above its 200-day moving average.

Markets are looking ahead to U.S. jobless claims data due at 1230 GMT. A slight slowdown in jobless claims is expected, though some traders might be primed for a positive surprise after Friday’s payrolls report showed a completely unexpected easing in the jobless rate.