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Dollar Stronger Ahead of Fed

Posted by Joseph Trevisani on Mar 20, 2018 8:34:41 PM

Equities, the dollar and Treasury yields rose on Wednesday one day before the Federal Reserve's rate decision at the conclusion of its first meeting under new Chairman Jerome Powell

The central bank is expected to increase the Fed Funds rate 0.25 percent to 1.75 percent continuing the gradual normalization of interest rates that began in December 2015.

Equities recovered after Monday's large losses with the Dow ahead 116.36 points, 0.47 percent, the S&P 500 up 0.15 percent and the Nasdaq adding 0.27 percent.

The dollar gained against all its major counterparties, closing at 1.2240 versus the euro, its strongest this month and 106.53 in yen. The Dollar Index finished at 90.371, also the best close for this basket since March 1st.

Treasury yields improved with he 10-year adding four basis point to 2.89 percent its highest since 2.95 percent on February 21st, and the 2-year rising four points to 2.34 percent.

While the FOMC vote to boost its benchmark rate is widely anticipated, market attention will be focused on the bank's Summary of Economic Projections, specifically the estimated Fed Funds rate at the end of the year and how many increases are implied by that rate.

At the December meeting the projection of 2.1 percent at the end of 2018 meant that three 25 basis point increases would be needed from the then current rate of 1.5 percent.

Strong economic growth in the second and third quarters of last year averaging 3.15 percent annualized and initial estimates for 3 percent or more in the fourth quarter had excited speculation that the Fed might be forced to move to four hikes in 2018.

But the actual fourth quarter GDP figure of 2.6 percent, expected to be unchanged after the final revision on March 28th and much lower forecasts for first quarter growth, currently at 1.8 percent in the Atlanta Fed GDPNow model, have dampened the anticipation for speedier rate increases.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thompson/Reuters

 

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