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The US dollar came storming back after the Federal Reserve lowered US benchmark interest rates by 3/4% to 2.25%, igniting a rally in US stocks, with the S&P 500 gaining over 4% on the day. The initial reaction to the Fed decision was a bit of disappointment as traders were hoping for a more substantial 1% rate cut. Stocks and the US dollar initially fell, with USD/JPY dropping from about 98.80 to a low around 97.80 before rebounding sharply as stocks held their ground and battled back higher. Within the hour, USD/JPY had regained its pre-Fed level at 98.80, aided by a reinforcing rebound in US stocks returning to their pre-Fed highs. Short-covering buying of USD/JPY then took firm hold and USD/JPY vaulted above 99.00, triggering additional short-covering buying interest. USD/JPY continued on to touch the 100.00 level before the end of the day as stocks rallied strongly into the close. The European single currency, the Euro, also fell against the USD, in what became a broad-based rebound for the beleaguered greenback. The positive earnings reports of two major Wall Street firms had set a positive tone to most asset markets early in the day and the Fed's rate cut was the icing on the cake. However, it's unclear how long the euphoria will last as the Fed statement accompanying the rate decision painted a still bleak outlook for the US economy.

The Fed's statement on the economy noted both that the growth outlook had deteriorated further and that inflation remained elevated, potentially limiting the Fed's room to maneuver in the future. The Fed continued to express confidence that inflationary pressures would subside, but two inflation hawks on the FOMC dissented in the vote, favoring a smaller rate reduction. The Fed cited weakness in the housing market and tighter credit conditions as the two main drags on the US economy. In other data released today, Feb. producer prices (PPI) excluding-food and energy rose 0.5% MoM and saw the core-PPI rate rise to 2.4% YoY rate. February housing starts fell slightly from 1.071 mio units annually to 1.065 mio, while building permits fell more sharply from 1.061 mio units annually to 0.978 mio units.



In other markets, gold prices plunged over $20 to about $981/oz on the back of the USD rebound. US Treasury bonds fell sharply, sending the 2 year note's yield up over 25 bps to nearly 1.60%. Oil prices lost about $1.80 to close around $108.70/bbl.

Source: www.forex.com