The Australian dollar jumped back over 94 cents after the US Fed announcement. Photo: Bloomberg
The United States Federal Reserve’s announcement that low rates are here to stay sent the Australian dollar through US94¢, on its way to test the year’s high.
“The softness the dollar experienced over the past few days is coming to an end,” Commonwealth Bank of Australia currency strategist Joseph Capurso said.
Continuing negative real interest rates in the US would weigh heavily on the greenback, Mr Capurso said.
“Now that the Federal Reserve’s June policy meeting is out of the way, we expect the Australian dollar to grind higher to test the 2014 high of US94.61¢ in the next few weeks,” he said.
Following the statement, the local currency jumped to a high of US94.10¢, from US93.42¢ immediately prior.
The Commonwealth Bank currency analysts remain confident that the dollar will reach US97¢ by the end of the year.
Traders had expected that recent economic indicators such as higher-than-expected US inflation might have “sounded a note of caution,” instead Fed chair Janet Yellen confirmed monetary policy is in a holding pattern.
Westpac Global head of FX and commodity trading, Robert Rennie said the Fed’s announcement effectively sent a message to investors of “don’t worry about it, enjoy the soccer, and enjoy the northern summer”.
Mr Rennie said the “lack of volatility” in trading is expected to remain for some time off the back of the Fed announcement.
“If the Fed is going to continue to revise down its long term neutral [interest rate], that is a message markets are going to run with,” said Mr Rennie.
The US central downgraded its growth projections to 2.2 per cent from 2.9 per cent in March, and announced a $US10 billion reduction in bond and mortgage securities purchases, to bring the monthly total to US35 billion.
Local equities and bonds also rallied after the Fed indicated US money would remain cheap for until at least next year. The Australian 10-year bond yield fell from 3.73 per cent to 3.65 per cent.