The greenback went into a tumble downhill, as the Federal Reserve’s latest conference on economic policy thwarted expectations of an early tapering of the Quantitative Easing policy. As the US Dollar pressure on commodities eased off, it drove up the prices of Bullion and Crude oil. Other currencies like the Japanese Yen and the Euro also gained against a sliding US dollar.

On Wednesday, the Dollar index, that tracks USD’s movements against a group of six currencies of major trading partners, plunged by 1.4% to a low of 83.435. This pulled down the dollar index from its Tuesday’s three-year high of 84.753. This was apparently an immediate reaction to the Fed’s policy meeting minutes released this week.

Consequently, on the same day, the Euro climbed by 0.8 % to trade at $1.2986, while the Dollar fell by 1% against the Yen to trade at 99.65 yen. Later, on Thursday, the Dollar index continued to decline as it fell to 82.418, its lowest since June 25 this year. This was a 2.8% fall from the Tuesday’s three-year high of 84.753.

Meanwhile, Bernanke announced that Fed will not immediately raise the interest rates even after US unemployment rate reduces below the 6.5% target. This statement boosted the positive sentiments for the Bullion market. On Thursday, Spot Gold advanced by 2.7%to $1298.10 per ounce, its highest since June 24 of this year.

While, the U.S. gold futures surged by around 4% to post a two-and-a-half week high of $1,297.20 an ounce, it later settled down at $1,280, posting an overall gain of 2.6%. This is because a weakening of the US dollar, consequently, increases the purchase power of other currency holders, promoting dollar-denominated commodities such as gold.

In line with this trend, the Black Gold prices too entered a sharp rally with the backdrop of declining US crude oil stockpiles and the effects of Fed’s policy meeting minutes release. On Wednesday, the US Crude edged up by almost $3 to trade at $106.52 per barrel. This was its strongest intra-day rally since May 2 this year. Whereas, the WTI crude oil soared by 11% in the last 10 trading sessions, its largest gains since July 2012.

Looking into the reasons behind this sharp fall in the US Dollar, we find that the latest US unemployment and jobless claims data are the chief driving factors. The initial Jobless claims in US increased by 16,000 to 360,000 in the week ending July 6, its highest in the last two months. Furthermore, this rise was far worse than the expected 340,000 jobless claims, creating worry lines for many members of the Federal Reserve committee.

As a result, Bernanke, in his effort to pacify the markets, stated that the Fed plans to continue with its current monetary stimulus. This came in the backdrop of the US inflation languishing below the 2% target and a gloomy labor market data. Additionally, the economies of Japan and Eurozone decided to maintain their current monetary policy status, which further increased the downward pressure on the greenback.

This created a bearish sentiment in the US Dollar market and sent the Greenback on a downhill tumble. This caused many traders who sensed the negative sentiment for US economy to panic and close their long positions in the Dollar market, extending the rout in US Dollar for a few days.

However, the Federal Reserve is still eyeing at a possible early tapering of the bond purchase policy. These recent events have only postponed the possibility of the Fed’s QE pullback, for the meantime. When the US economy posts better employment data, the Fed is bound to revisit its time frame for a nearly tapering of the QE policy. This will probably send the Dollar again on steep rally in the future.   

Note: This blog is just an expression of the author’s opinion and cannot be deemed responsible for any losses incurred.