U.S. Dollar Strengthens Before the Fed Meeting

U.S. DollarThe U.S. dollar was broadly higher against a basket of other major currencies on Tuesday, June 16 as traders wait on the Federal Reserve’s monthly policy meeting.

As of 10:30 a.m. ET, the U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.24% to 95.04. Over the past twelve months, the index gained around 18%. The dollar was the strongest against the euro, the Japanese Yen, and the Australian dollar.

The Federal Open Market Committee is having a two-day meeting this Tuesday and Wednesday. In the meeting, the Fed will announce the federal funds rate—an interest rate at which banks lend balances held at the Federal Reserve to other banks overnight. There is also a conference at 2:30 p.m. on Wednesday, at which Fed Chair Janet Yellen will answer reporters’ questions.

Everyone is watching what the Federal Reserve will do at the meeting. The Federal Funds rate can have a significant impact on the economy, as it affects the value of the U.S. dollar and the amount of lending going into economic activity.

Economists expect that the central bank will raise interest rates sometime later this year or early next year. Although we are unlikely to see a rate hike in this week’s meeting, investors will pay attention to the press conference as the Fed Chair comments on the outlook of the economy and the timing of the future rate increase.

The Fed would base its decision on economic data and said that it would increase rates only if there is an improvement in the U.S. economy. First-quarter gross domestic product (GDP) was weak—a 0.7% decline year-over-year. For the second quarter, the Bureau of Economic Analysis estimated an increase of 0.2%. So far, inflation has been moderate.

If the interest rate goes up more than expected in the U.S., the greenback is likely to strengthen. However, the to-be-announced Federal Funds rate is likely already priced in the market. Analysts expect that the movement in the U.S. dollar will come from the Fed’s forward-looking statements.

According to many economists, a stronger dollar due to higher interest rates is not what the economy needs right now. The trade deficit is still large and any appreciation in the U.S. dollar would widen the gap even further. Higher interest rates would also make borrowing more difficult, so businesses would find it harder to finance their operations. There is an up side, though, as higher interest rates could cool down the stock market.