Fed Meeting Over: What Next For the US Dollar?

The Federal Reserve monetary policy meeting is now behind us and with no major changes to inflation outlook and growth assessment, the impact on the currency market has been limited. The dollar is slightly higher across the board, but no new daily highs or lows have been achieved after the rate announcement.

The rally in the dollar represents the market?s relief that that the Fed did not address the problems in the sub-prime sector. In fact, the Fed kept their comments on the housing market virtually unchanged. As for inflation, even though they acknowledged the fact that core price growth improved, they weren?t entirely convinced that the battle has been won. Instead, they still felt that inflationary pressures will refuse to fall. With oil prices hitting an intraday high of $70.52, the Fed has good reason to be worried. It should not be long before we see the national average of gasoline prices move back above $3 a gallon. The Federal Reserve really had no choice other than to keep the tone of the statement unchanged in order to tame the stock market bubble. For a comparison between the last two FOMC statements, see our Instant Insight. Although traders will be watching tomorrow?s PCE deflator for evidence of growing inflationary pressures, the more important releases will be personal income and personal spending. Should the gap between spending and income widen, then the US economy could seriously be in trouble, especially since the market is looking for the gap to narrow significantly. Beyond that, non-farm payrolls and service sector activity next week will provide traders with better clues on how the US economy is doing. For the time being, there is nothing to threaten the immediate trend of the US dollar.