The Federal Reserve raised interest rates by 25bp and instead of rising, the dollar sold off aggressively against all of the major currencies. The short-term interest rates or also known as "short end" of a yield curve went higher as expected. However, long term yields went down due to slower inflation expectations. A flattening yield curves is hurt the US Dollar which was seen by the sell-off.
Janet Yellen gave her final press conference as Fed Chair and said Trump tax reform has limited impact to growth and inflation in the long term.
Furthermore, the gains in dollar for the past few months was largely driven by tax cut. Thus, traders now were selling off their dollar long exposure.
Lastly, the ECB meeting yesterday also hurt the Dollar as a dovish ECB was not really priced into the market. While Draghi's message was more hawkish than the market anticipated, the main takeaway is that even though the economy is improving, they have no plans to raise interest rates anytime soon. A gradual hike by ECB seems likely in 2018, which indicates less hopeful sentiments for the dollar to rally.
With US Treasuries curve flattening after Fed raised the rate, short USD/JPY?
Fullerton Markets Research Team
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