Dollar Recovers After Powell Rules Out Negative Interest Rates

By | May 14, 2020
Dollar Recovers After Powell Rules Out Negative Interest Rates

The U.S. dollar recovered after early weakness and spent the rest of the session on Wednesday in positive territory, after the Federal Reserve Chief Jerome Powell ruled out negative interest rates.

During a webcast hosted by the Peterson Institute for International Economics, Powell warned the coronavirus crisis raises longer-term concerns that could result in an extended period of low productivity growth and stagnant incomes.

His views are largely in line with several economists who have predicted the economy is unlikely see a v-shaped recovery.

Powell said the central bank may take additional steps to support the economy but is not considering adopting negative interest rates.

“At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way,” Powell said.

However, Powell signaled the Fed remains reluctant to impose negative interest rates, which President Donald Trump has repeatedly called on the central bank to enact.

“I know there are fans of the policy, but for now it’s not something that we’re considering,” Powell said. “We think we have a good toolkit and that’s the one that we will be using.”

The Fed Chief noted the economic outlook is “both highly uncertain and subject to significant downside risks” and suggested it may be necessary for Congress to provide additional stimulus.

On Tuesday, House Democrats unveiled a new $3 trillion coronavirus relief bill. It is very likely that the bill will face considerable opposition in the Republican-led Senate.

The dollar index, down nearly 0.4% at 99.58 at one stage, rallied to 100.28 later on, netting a gain of more than 0.3%.

Against the Euro, the dollar firmed up to $1.0818 from $1.0897, on dismal eurozone economic data and Powell’s comments on U.S. interest rates.

Eurozone industrial production decreased sharply in March, as several countries went into lockdown to slow the spread of the coronavirus, or Covid-19, pandemic, preliminary data from Eurostat showed.

Industrial production decreased 11.3% month-on-month, which was slightly less than the 12.1% slump economists had forecast. In February, output fell 0.1%. On a year-on-year basis, industrial production decreased 12.9% in March after a revised 2.2% drop in February.

The pound sterling was weaker at $1.2236, down 0.2% from Tuesday’s close. Weak U.K. retail sales data and GDP numbers weighed on the British currency.

The UK economy contracted the most since the global financial crisis in 2008, due to the measures adopted to reduce the transmission of the coronavirus, the Office for National Statistics said. The data said gross domestic product fell 2% sequentially in the first quarter, which was the largest decline since the fourth quarter of 2008.

A report from the British Retail Consortium, or BRC, showed UK retail sales declined the most since records began in 1995. Total retail sales plunged 19.1% year-on-year in April compared to a 2.4% rise in April 2019.

Against the Yen, the dollar was marginally weak a unit fetching 107.03 yen, less than 107.13 yen Tuesday evening.

The Aussie was weaker at 0.6453 a U.S. dollar, compared with $0.6472 on Tuesday.

Against Swiss Franc, the dollar was little changed at $0.9698, and against the Loonie, it was last seen at $1.4103.