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Dollar Rebounds After Fed Announces Tapering; Bank of England Meets

The dollar traded higher Thursday, rebounding from the previous session’s losses after the Federal Reserve said it was in no rush to raise interest rates after it began tapering its bond-buying program.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 94.088, climbing after Wednesday’s near 0.3% fall.

Additionally, EUR/USD fell 0.3% to 1.1577, giving up Wednesday’s gains, while USD/JPY rose 0.2% to 114.25, not far from the multi-year high of 114.69 hit last month.

The Fed announced late Wednesday that it would reduce its $120 billion monthly bond-buying program by $15 billion initially, as widely expected, but Chairman Jerome Powell said the U.S.

central bank would be "patient" in deciding when to raise its benchmark overnight interest rate from near zero levels.

The dollar weakened Wednesday with traders judging Powell’s comments as being dovish, given that inflation currently stands at 30-year highs. However, it has since rebounded.

“The fact that the dollar continues to trade near its recent highs against EUR and JPY should be a reminder that: (a) EUR and JPY look better funding currencies than the dollar and (b) that the Fed has fired the starting gun on policy normalization, eventually tighter dollar liquidity, higher US rates and what should be a stronger dollar,” said analyst at ING, in a note.

Elsewhere, GBP/USD fell 0.2% to 1.3657, down from its week high of 1.3698 hit earlier Thursday, as traders positioned for a Bank of England policy-setting meeting later in the session.

Markets are pricing in a rate rise from the U.K. central bank on the back of surging inflation, which would be the first rate hike from the world’s major central banks since the start of the Covid-19 pandemic. That said, the decision is likely to be a close call as economic growth is starting to slow.

“GBP has corrected a little this week already and we suspect that it may have a little further to go should it appear that Governor Bailey does not carry at least 8 of the nine member MPC with him in voting for a 15bp rate hike,” added ING.

USD/PLN traded 0.5% higher at 3.9608 and EUR/PLN also gained 0.1% at 4.5835 the day after Poland’s central bank raised its key interest rate by three quarters of a percentage point, more than expected, to try and combat surging inflation.

USD/CZK rose 0.3% to 22.0000 while EUR/CZK dropped 0.1% to 25.4570 ahead of a meeting of the Czech National Bank, which is expected to result in another rate hike.

The central bank delivered a 75-basis-point hike in September, its biggest since 1997, to combat rapid price growth, and is expected to deliver something similar later Thursday.

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