Currency Note US Dollar

US starts to taper as US economy strengthens

By Ricky Bean December 19th, 2013

The US dollar started yesterday with mixed fortunes, falling first against sterling and the euro, but making gains for the first time in four days against the Japanese yen in anticipation of the central bank decision in the evening. The Federal Reserve voted in favour of tapering its quantitative program by $10 billion a month ($5bn reduction in treasury purchases and $5b in mortgage bonds) starting from January. The central bank stated that the decision to taper was largely due to the improved outlook for the labour market, noting  that the unemployment rate will fall faster than previously thought whilst also raising its GDP growth forecasts. Despite this – the comments made from the outgoing Chairman Ben Bernanke were very accommodative, suggesting interest rates will not be hiked until “well past the time that the unemployment rate declines below 6.5%” and especially if inflation remains low. He also made clear that tapering the quantitative easing program shouldn’t be deemed as tightening monetary policy and the continued tapering would be depending on more encouraging data coming from the US. Furthermore, a $10 billion reduction a month is but a drop in the ocean when you consider that the Federal Reserve’s quantitative easing program has put over a $1 trillion dollars of debt onto its balance sheet to date. Data released yesterday played second fiddle to the central bank announcement with the building permits figure coming out as expected. Today there are a number of data releases due to follow on from last night’s decision. Firstly, we will hear the ever important unemployment claims data, while later on we have both the existing home sales data and the Manufacturing Index from the Philadelphia Fed, although further reactions and fallout from the tapering decisions and forward guidance will have a much greater bearing on the US dollar. Get in touch with your trader now for the latest US dollar rates.