Dollar takes a breather, but its retreat is unlikely to last long

The U.S. dollar fell slightly on Thursday as investors adjusted to the Federal Reserve’s possible decision to continue raising interest rates further on.

According to Reuters, on Wednesday, the U.S. central bank raised its benchmark funds rate again by 75 basis points to 3.75–4%.

After the Fed’s last meeting, Chairman Jerome Powell told reporters that now it’s too early to consider a possible suspension of monetary policy tightening. Moreover, it’s more likely that interest rates will be raised even higher than expected. However, the bank has a certain strategy.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, noted a small retreat of the dollar after yesterday’s growth, but also pointed out the fact that the market activity in Japan was reduced due to the holiday.

In addition, Tan highlighted that the Fed is aimed mostly at fighting inflation, therefore, the bank will continue to tighten monetary policy. Consequently, the dollar’s retreat is likely to be short and temporary.

Analysts at Citi recommend keeping the U.S. dollar’s long positions in Asia as the Fed Chair’s so-called “hawkish” statements indicate that policy softening may not happen soon, thereby dimming market expectations. Further tightening of financial conditions will have a negative impact on risky assets, but strengthen the dollar.