Archived IMT (2009.01.28)

The resulting dollar rally following the Fed decision is in line with my morning note which stated currency markets may curtail some of the dollars recent losses as a knee-jerk reaction to finding out that the Fed would not start purchasing long term treasuries. The FX market reaction is largely dollar-driven (and not risk appetite driven) as the US currency steadies across the board.

Well aware of the risks of rising long term treasury yields occurring despite ultra low short term rates, the Fed has reiterated its readiness to contain such a risk by signalling the potential to buy long term treasuries (to drive down yields), which it sees no need to do at the moment due to the steepening of the yield curve (widening difference between 10 and 2 year yields) emerging since the end of December from 120 bps to 170 bps. EURUSD seen supported at $1.3050, USDJPY capped at 91.40