US Dollar Recovers As Federal Reserve Dismisses Negative Interest Rates

The US dollar has wiped out all its losses from earlier in the midweek trading session after the Federal Reserve dismissed it would be introducing negative interest rates. Fed Chair Jerome Powell’s grim assessment of the US economy could prompt investors to pour into the greenback as a safe-haven asset since financial markets tumbled throughout his press conference.

On Wednesday, the head of the central bank delivered prepared remarks at the Peterson Institute for International Economics. In his speech, Powell acknowledged that the damage from the coronavirus pandemic is “significantly worse than any recession since World War II.” He warned that the recovery is likely to be a lot slower than everyone would want, urging additional fiscal support from Congress to prevent long-term economic pain.
Since many observers anticipated Powell to say this, the main focus was on if the Fed would be introducing negative rates, which is something President Donald Trump has been urging for a long time. Powell noted that the central bank’s view on subzero rates had not been altered, and it is not something the Federal Open Market Committee (FOMC) is even considering.
In March, the Eccles Building slashed rates by 150 basis points to bring the benchmark overnight rate to near zero, in addition to a multi-trillion-dollar quantitative easing initiative.
Powell did leave the door open to extra monetary stimulus:

While the economic response has been both timely and appropriately large, it may not be the final chapter.

Overall, he is concerned that a longer and deeper recession would cause “an extended period of low productivity growth and stagnant incomes.” Powell alluded to widespread insolvencies among small- and medium-sized businesses, and workers losing their skills.
The bearish speech did impact equities as the leading stock indexes were down about 1%.
On the data front, mortgage applications edged up 0.3% for the week ending May 8, according to the Mortgage Bankers Association (MBA). The producer price index (PPI) tumbled 1.3% in April, while the core PPI slipped 0.3%. On Wednesday, the inflation rate fell by 0.8% last month, while the core inflation rate slid 0.4%.
The US Dollar Index, which measures the greenback against a basket of currencies, rose 0.1% to 100.03, from an opening of 99.93. The index has advanced nearly 4% year-to-date due to investors parking their money in the buck amid uncertainty in the international marketplace.
The USD/CAD currency pair jumped 0.06% to 1.4088, from an opening of 1.4079, at 15:25 GMT on Wednesday. The EUR/USD dropped 0.17% to 1.0832, from an opening of 1.0848.
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