Dollar gains after Fed shifts inflation target as expected

A U.S. Dollar banknote

By Karen Brettell

NEW YORK (Reuters) – The U.S. dollar gained on Thursday after Federal Reserve Chairman Jerome Powell said, as was widely expected, that the U.S. central bank would roll out an aggressive new strategy to lift U.S. employment and inflation.

Under the new approach, the U.S. central bank will seek to achieve inflation averaging 2% over time, offsetting below-2% periods with higher inflation “for some time,” and to ensure employment does not fall short of its maximum level.

“The market expected most of this,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

There are doubts about whether the Fed will be able to lift inflation, despite the new target.

“The Fed hasn’t achieved its inflation targets since 2012, and so now they’re saying ‘now we‘re serious about it…’ I don’t think that’s what creates inflation, or really the inflation expectations,” Chandler said.

The dollar index <=USD> initially sank on the announcement, before rebounding to be up 0.20% on the day at 93.00.

The greenback has been consolidating since losing 4% in July, which was the worst monthly loss in a decade.

The euro <EUR=> fell 0.07% to $1.1821.

Longer-term, if the Fed is able to increase price pressures but also leave rates near zero for longer, the policy would be negative for the dollar.

“What’s going to happen is when you have all the other central banks starting to pull back their stimulus, starting to show signs of tightening, the Fed is going to lag on that, said Edward Moya, senior market analyst at OANDA in New York.

“You’re going to see that interest rate differential not be in the dollar’s favor. It’s just providing a longer-term bearish outlook for the greenback,” Moya said.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits hovered around 1 million last week, suggesting the labor market recovery was stalling as the COVID-19 pandemic drags on and financial aid from the government dries up.

The British pound <GBP=> reached an eight-month high of $1.3283 against the greenback earlier on Thursday, before falling back to $1.3202.

(Reporting by Karen Brettell; Editing by Dan Grebler)