Investors that were battered and bruised by the euro-dollar currency war landed some heavy counter punches after the Fed meeting ended on Wednesday.
Janet Yellen faced reports after wrapping up the two-day March Federal Reserve Open Market Committee meeting. As was widely expected, The Fed eliminated the phrase “patient” from their descriptive language on when they will start raising US interest rates.
As she fielded questions, the big reaction was aroused by the Fed’s acknowledgement of a string of weak economic data (that some forecasters blamed on winter storms) that is tempering her rush to raise rates. Yellen pointed to the strong dollar as the culprit and explained that just because the Fed removed patient from their stance doesn’t mean they will be impatient.
The collapse in the dollar was immediate and dramatic:
And had a knock on effect on commodities was equally intense (XOP, S&P Oil & Gas Expl & Production ETF):
And gold, (GDXJ, Market Vectors Jr Gold Miners ETF):
Why the huge reaction? The markets interpretation of Yellen’s economic warning is that QE did not make the US economy immune from the weakness sweeping across the rest of the globe. The speculation-driven dollar rally that heated up last August was based on the premise that our economy had enough velocity to pull ahead even if the rest of the world was going in reverse. It is becoming apparent that our economy can’t withstand a global slowdown after all.
In regards to the question about how far the dollar rally will last, we probably have our answer. The question that will be answered in the coming weeks is how fast speculators unwind the short euro/long dollar trade that is getting squeezed hard today.