AC: Dollar Rebound as Fed's OT Disappointed Markets, But Reversed on Merkels' Bond Purchase Comment
FOMC maintained rates unchanged at historical low of 0-0.25% as widely expected and announced to expand the Operation Twist program by $267b to drive down long-term interest rates and "make broader financial conditions more accommodative". The original $400b Operation Twist program, which was announced last September, will expire this month. After that Fed will sell securities with of 3 year remaining maturities or less, and replace with 6 to 30 years securities. Fed maintained the pledge to keep rates at exceptionally low level at least through late 2014. In additional, Fed also pledged to "take further action as appropriate to promote a stronger economic recovery and sustain improvement in labor market conditions in a context of price stability." Regarding inflation, Fed noted that inflation has declined reflecting lower energy prices and long-term inflation expectations have "remained stable." It noted that “growth in employment has slowed in recent months, and the unemployment rate remains elevated." Jeffery Lacker, president of the Richmond Fed, dissented for the fourth straight meeting and said he opposed the continuation of Operation Twist.
Dollar rebounded strongly immediately after Fed's announcement while stocks dipped. However, the situation quickly turned after report that German Chancellor Merkel said bond purchasing by European rescue funds is a possibly. That marked Germany's acceptance of a proposal by Italian prime minister, Monti, to use Eurozone's two rescue funds to buy bonds of Italy, Spain, and other distressed Eurozone countries, in the secondary markets to bring down borrowing costs. French president Francois Hollande already expressed his acceptance. Leaders of Germany, Italy, France and Spain are expected to discuss the issue on Friday.
Sterling had little reactions to BoE minutes released today. The June minutes for the BOE meeting unveiled that the members were more split on whether to increase asset purchases to stimulate economic growth. With 5 votes favoring no change while 4 votes supporting additional easing, it has become increasingly likely that the central bank would announce a raise in asset purchases at the next meeting. Inflation has moderated more than anticipated and should have created a more comfortable environment for easing policies. More in BOE More Inclined To Increase Size Of Asset Purchases. Data from UK saw claimant count unexpectedly rose by 8.1 in May while unemployment rate was unchanged at 8.2% in April.
