Dollar Climbs As Fed Adopts Average Inflation Target

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The U.S. dollar gained ground in the New York session on Thursday, erasing its losses, after Federal Reserve Chair Jerome Powell announced a new strategy for meeting its price stability and employment goals amid a deep economic crisis due to the coronavirus pandemic.

In his online remarks to the Kansas City Fed’s annual economic symposium, Powell said that the Fed will change its approach to a “flexible form of average inflation targeting.”

The Fed chief stressed that the longer-run goal continues to be an inflation rate of 2 percent but noted inflation will average less than that if it runs below 2 percent following economic downturns and never moves above that level even when the economy is strong.

“Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down,” Powell said.

He added, “To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time.”

Powell said appropriate monetary policy will therefore likely aim to achieve inflation moderately above 2 percent following periods when inflation has been running below that level.

“In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average,” Powell said. “Thus, our approach could be viewed as a flexible form of average inflation targeting.”

Data from the Commerce Department showed that economic activity in the U.S. contracted slightly less than initially estimated in the second quarter.

The report said real gross domestic product plummeted by 31.7 percent in the second quarter compared to the previously reported 32.9 percent nosedive. Economists had expected the plunge in GDP to be revised to 32.5 percent.

Data from the Labor Department showed that initial jobless claims pulled back in the week ended August 22.

The report said initial jobless claims dropped to 1.006 million, a decrease of 98,000 from the previous week’s revised level of 1.104 million. Economists had expected jobless claims to decline to 1.000 million.

The greenback showed mixed performance against its major peers in the Asian session. While it fell against the euro and the yen, it was steady against the franc and the pound.

The greenback was up by 1 percent at 1.1787 against the euro, after having fallen to an 8-day low of 1.1901 at 9:15 am ET. The pair was worth 1.1830 when it closed deals on Wednesday. Next immediate resistance for the greenback is likely seen around the 1.15 level.

Data from the European Central Bank showed that Eurozone money supply and private sector credit growth accelerated in July.

The monetary aggregate M3 expanded 10.2 percent on year versus a 9.2 percent rise in June. The rate was expected to remain unchanged at 9.2 percent.

The USD/JPY pair bounced off to 106.30, registering a gain of 0.7 percent from a 6-day low of 105.60 seen at 9:15 am ET. The pair had closed Wednesday’s deals at 105.98. The greenback is seen facing resistance around the 108.00 mark.

Data from the Ministry of Economy, Trade and Industry showed that Japan’s all industry activity rose for the first time in five months in June.

The all industry activity index rose 6.1 percent month-on-month in June, after a 4.1 percent decline in May.

The greenback, having dropped to an 8-day low of 0.9036 at 9:15 am ET, reversed its course against the franc and was trading higher at a 2-day high of 0.9124. At yesterday’s trading close, the pair was quoted at 0.9083. The greenback is likely to locate resistance around the 0.95 region, if it gains again.

Data from the State Secretariat for Economic Affairs showed that Switzerland’s economy contracted at a record pace in the second quarter as economic activity was severely restricted amid the coronavirus pandemic.

Gross domestic product fell 8.2 percent sequentially in the second quarter after falling 2.5 percent in the previous quarter.

The greenback appreciated 0.9 percent to 1.3161 against the pound, after touching 1.3285, which was its lowest level since December 2019. The GBP/USD pair had ended yesterday’s trading session at 1.3209. Further rally in the currency may find resistance around the 1.25 region.

The greenback reclaimed some of its lost ground against the loonie, with the pair trading at 1.3161. This follows more than a 7-month low of 1.3106 set at 9:15 am ET. The greenback was trading at 1.3143 against the loonie at yesterday’s close. Extension of the greenback’s uptrend may lead it to a resistance around the 1.33 region.

Following a 1-1/2-year decline to 0.7291 at 9:15 am ET, the greenback bounced off to 0.7217 against the aussie. The greenback was worth 0.7232 per aussie at Wednesday’s New York session close. Should the greenback strengthens further, it is likely to test resistance around the 0.70 region.

Data from the Australian Bureau of Statistics showed that Australia’s private sector capital expenditure declined less-than-expected in the second quarter.

Total new capital expenditure decreased 5.9 percent in the second quarter from the previous three months, when it was down by revised 2.1 percent. Economists had forecast a quarterly drop of 8.4 percent.

The greenback spiked higher to 0.6603 against the kiwi, reversing from near a 3-week low of 0.6675 it recorded at 9:15 am ET. At Wednesday’s close, the pair was valued at 0.6621. Next near term resistance for the greenback could be possibly seen around the 0.64 level.

The material has been provided by InstaForex Company – www.instaforex.com

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