Dollar Pared Some Gains as Fed Continued Tapering, Sounded Cautious

Dollar pares back some of the GDP inspired gains after FOMC announced to continue to taper the monthly asset purchases as widely expected. DOW once dived to as low as 16817.16 but recovered after the FOMC announcement and is trading near term flat around 16900 area. SP 500 is indeed having mild gain at the time of writing. Fed continued that $10b per meeting reduction in monthly bond buying, to USD 25b. Interest rate was held near zero. The accompanying statement wasn’t much changed from the prior one. Nonetheless, there were two main points to note. Firstly, Fed added that “a range of labor market indicators suggests that there remains significant underutilization of labor resources” even though “labor market conditions improved”. Secondly, Fed “judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.” The overall impression on the statement is that Fed is in no hurry to raise interest rates even though the bond buying program is on course to end in October.

Earlier today, dollar surged across the board after much strong than expect GDP data. In Q2, GDP grew at 4.0% annualized rate, the highest level since Q3 of 2013, and beat consensus of 3.1%. The solid gain more than offset Q1’s -2.1% contraction, upwardly revised from prior estimate of -2.9%. The economy grew at about 1% pace for the first half of 2013. The GDP report overshadowed the disappointing ADP employment report, which showed 218k growth in private sector jobs comparing to expectation of 241k. Focus should now turn to Friday’s non-farm payroll report.

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