What does the US Fed Chairman Powell statement mean for the US dollar

According to the results of Friday’s speech by the US Federal Reserve Chairman Powell at a symposium in Jackson Hole, the US dollar accelerated the decline across the market. Several reasons, which I would like to discuss below, can be called as the reason for the collapse of the American currency.

US Fed Actions

The main reason and catalyst for the weakening of the US dollar was the Fed’s policy. Or rather, the dovish rhetoric of Fed Chairman Powell. Despite the fact that Jerome Powell made significant statements regarding a strong labor market and positive inflation data in the USA, he described the work of the Fed as follows:

“We will act accordingly to support the growth.”

But with all the positive statements, the market did not hear what was expected. And the market’s expectations were that the Fed would indicate a short cycle of stimulating the US economy by rates cuts. The US Federal Reserve Chairman Powell in his introduction did not cover this topic, which caused an increase in negative sentiment regarding the US currency.

The absence of hints and ignoring such an important issue was regarded by the market to a greater extent as an opportunity to reduce rates in the future. But, given the Fed Chairman speech and other members of the Fed, it becomes clear that the US Federal Reserve has no clear opinion on interest rates in this situation.

So, earlier, several Fed members spoke in favor of maintaining rates at the current level after the decline. Thus giving hope to the market for a short cycle of rates cuts in the USA. Other Fed members adhere to further rate cuts. Against the background of uncertainty between the Fed members, the neutral position of the head of Powell looks more alarming.

This caused a significant increase in pessimistic sentiment and the collapse of the US dollar.

Extra pressure on the dollar

The response of Chin was an additional driver for the US dollar decline. Chinese representatives announced on Friday their intention to introduce new duties on American cars and auto parts, aggravating the risks of a trade war.

After the speech of the US Federal Reserve Chairman Powell, the reaction of the US President D. Trump followed. Who tweeted:

“As usual, the Fed did nothing.”
“I have one question: who is our main enemy – Jay Powell or Chairman Xi.”

This intensified the pressure of the US Federal Reserve from the White House, shifting the already negative market sentiment towards stimulating the US economy.

As a result, the US dollar remains under the significant pressure of uncertainty associated with a further reduction in rates and an exacerbation of the US-China trade war.

Anton Hanzenko