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Asian Session – Dollar falls on lower growth outlook and slower pace of rate increases

The dollar fell on Wednesday after the publication of the FOMC statement and the Fed’s economic projections, which showed a reduction in the growth outlook for 2015-2017. The lower growth forecasts signalled a slower pace of increase in the interest rates than anticipated. However, markets were somewhat disappointed that the FOMC statement did not provide a clearer timeline of when interest rates are likely to go up.

The statement said that economic growth has been expanding moderately but the Fed would like to see further improvements in the labor market and can be reasonably confident that inflation is moving back to its 2% target in the medium term before it would be appropriate to raise the target range of the federal funds. Although no clues were provided as to when the Fed expects this would be achieved, the projections signalled two rate increases in 2015, with the median forecast of interest rates at the end of 2015 to be 0.625%.

The dollar was steadier in Asian trading after falling against major currencies in US session. The euro retreated from a high of 1.1374 earlier in the day to 1.1346 in late Asian session. The pound also gave up some of its gains and was trading at 1.5813. But against the yen, the dollar continued to drift lower and was down at 123.02.

One exception against the dollar weakness was the kiwi, which reversed earlier gains to head sharply lower to 0.6893. This came after first quarter GDP data showed that the New Zealand economy grew by just 0.2%, against forecast of 0.6%, raising expectations that the central bank will cut interest rates again at its July meeting.

Shares in Asia followed European shares lower on Thursday as markets remain nervous over the outcome of today’s Eurogroup meeting of Eurozone finance ministers. The Bank of Greece issued a warning to the Greek government saying that failure to reach an agreement could lead to a “painful course” of exit from both the Eurozone and the EU. There was some hope of compromise on Wednesday after Greece’s top negotiator said that Greece is willing to make concessions as long as it doesn’t include any further cuts to pensions.

Apart from the Eurogroup meeting on top of investors’ agenda, UK retail sales and US inflation figures for May will be closely watched too. Initial US weekly jobless claims and the Philadelphia Fed Manufacturing index are also published today.

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