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Dollar Pushes Higher against Euro and Pound as Fed's Powell Pours Cold Water on Prospect of Negative Interest Rates

- Dollar buoyed following Powell speech
- Govt. must do more to support economy says Powell
- Skirts question of cutting Fed funds to negative

Powell

US Flag - GBP/USD spot rate at time of writing: 1.2225
- Bank transfer rates (indicative guide): 1.1890-1.1980
- FX specialist rates (indicative guide): 1.20-1.2115 >> more information

The U.S. Dollar dodged a potential bullet and turned higher in mid-week trade after the Chair of the U.S. Federal Reserve Jerome Powell failed to signal the Fed was preparing to cut interest rates into negative territory.

Speculation had grown substantially ahead of Wednesday's speech that some kind of nod would be given towards the prospect of negative interest rates being introduced in the near-future, an outcome that some analysts said would likely limit the Dollar's upside.

However, Powell instead insisted that the Fed's ambitions had limits as he used the address and ensuing answers to the quash expectations for negative interest rates.

Speaking at the Peterson Institute for International Economics (PIIE), Powell said that the scale of the unfolding economic crisis in the U.S. and around the world was greater than anything witnessed since the Second World War, but ultimately there were limits to what the Fed could do to mitigate the situation.

"The burden has fallen most heavily on those least able to bear it... Almost 40 percent of those in households making less than $40,000 a year had lost a job in March. This reversal of economic fortune has caused a level of pain that is hard to capture in words," said Powell.

He added, "the scope and speed of the downturn are without modern precedent" and there is a risk that "the passage of time can turn liquidity problems into solvency problems".

Getting the U.S. economy back on its feet would therefore likely require further measures to be instituted by the government, said Powell, noting that "the Fed has lending powers, not spending powers".

Suggesting government policy could be required to aid the economy, Powell said, “additional fiscal support could be costly, but worth it if it helps avoid long-term economic damages and leaves us with a stronger recovery”.

"Given this backdrop we strongly suspect there will be another round of major fiscal stimulus that receives broad support in Congress," says James Knightley, Chief International Economist at ING Bank.

While Powell made no mention of cutting U.S. interest rates to negative in his set speech, he did address the issue in the question and answer session that followed, saying cutting to negative is not something that is actively being considered.

Powell's messaging on the issue backs up what other Fed members have been saying on the issue, suggesting there is little prospect of it happening.

The prospect of negative interest rates in the U.S. was ramped up by President Donald Trump who took to Twitter on Tuesday to urge the Fed to consider cutting interest rates to negative:

"As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the “GIFT”. Big numbers!" said Trump.

ING's Knightley says cutting interest rates to below zero is a challenging request of the Fed, which is expected to focus policy around unlimited quantitative easing, liquidity and funding measures.

"The Fed’s stimulus will remain in play for many more months with very little prospect of a rate hike away from the emergency lower bound within the next year and a half," says Knightley.

The Dollar maintains a broadly buoyant tone against the Euro, Pound Sterling and other major currencies in the wake of the address and we don't see any big shift lower in the Greenback on the horizon.

The Pound-to-Dollar exchange rate continues to trend lower and is quoted at 1.2226 at the time of writing, while the Euro-to-Dollar exchange rate is quoted at 1.0840 ensuring it treads water towards the bottom of a long-term historical range.


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