This was published 9 years ago
Fed 'dots plot' drives Australian dollar to new six-month low
By Bianca Hartge-Hazelman and Misa Han
The Australian dollar fell to a fresh six-month low after a meeting of the US Federal Open Market Committee signalled that US interest rates are likely to rise at a faster pace next year than previously expected.
The Aussie fell 1.3 per cent overnight on Thursday and touched as low as US89.39¢, its lowest since March 3. The currency was buying US89.6¢ in late trade, down from just below US91¢ on Wednesday.
US Federal Reserve chair Janet Yellen.Credit: AP
The overnight drop was triggered by the "dots plot", a chart which showed the Federal Open Market Committee (FOMC) participants' estimate of the ideal interest rate for achieving full employment and stable prices.
The chart showed a higher median expectation for the official interest rate in 2015 of 1.375 per cent, which would imply five rate hikes next year, followed by another five rate hikes in 2016 to 2.875 per cent, according to Commonwealth Bank of Australia.
The Australian dollar has fallen to a six-month low.Credit: Louie Douvis
"In our view, the rates market has reacted to the improvement in US economic data and the more hawkish dots," CBA senior currency strategist Joseph Capurso said.
The overnight fall in the Aussie was driven by greenback strength as the local currency only dropped 0.5 per cent against the euro to 69.7 euro cents and gained 0.5 per cent against the yen to ¥97.7. However, against the pound sterling it dropped in line with the US dollar, at 1.3 per cent to 54.9 pence.
The US Federal Reserve defied bets that it would drop a pledge to keep interest rates near zero for a "considerable time" but revised upwards its estimate for the federal funds rate at the end of 2015. Fed chair Janet Yellen said data showed the US economy was improving in her policy statement at the conclusion of the FOMC meeting in Washington.
"The labour market has yet to fully recover," Fed Chair Janet Yellen told a press conference. "There are still too many people who want jobs but can't find them." She added that "inflation has been running below the committee's 2 percent objective."
Westpac New Zealand senior market strategist Imre Speizer described the FOMC outcome as a "mixed bag" with Yellen's later press conference revealing a slightly hawkish tone compared to her dovish pledge that policy rates would be low for a "considerable time".
Australian short dated 3 year government bond future yields rose from 2.88 per cent to 2.96 per cent overnight. The 10 year yield rose from 3.68 per cent to 3.74 per cent.
Many economists and traders had expected the central bank to deliver the $US10 billion cut to its bond buying program, which now takes it to $US15 billion a month in purchases. It did not alter its rate guidance or stop using the two word's "considerable time" in reference to the need for near zero rates.
The Fed's target for overnight lending between banks is in the range of zero to 0.25 per cent, where it has been since 2008 when the financial crisis hammered industrialised economies.
Despite the Fed's unanimous decision, board member Charles Plosser of Philadelphia, who is against the central bank's easy money policies, argued that the use of considerable time should be abandoned.
Steen Jakobsen, chief economist and chief investment office of Saxo Bank said the end result shows that "Yellen is more in control of FOMC than market gives her credit for".