Dovish Fed provoked stocks rally and collapsed the dollar

The Federal Reserve and its chairman, Jerome Powell, changed their tune Wednesday, striking a surprisingly dovish tone that sparked a stock-market rally, tanked the U.S. dollar and roiled other financial markets. The Fed hinted that it may be at the end of its rate-hike cycle and further surprised investors by issuing a separate statement regarding its balance sheet, indicating that its efforts to reduce the $4 trillion asset portfolio could end sooner than expected. The tone was seen as an about-face from the Fed’s hawkishly received December meeting when it delivered its fourth rate increase of 2018.

“This is one of the most dovish turnarounds by a Fed chair that I have ever seen in my 30-year career,” said Tom di Galoma, managing director at Seaport Global Holdings. And the initial reaction across markets appeared in keeping with the perceived shift. The message delivered by the Fed “just couldn’t be much better for both bonds and equities and for the credit markets that track Treasurys,” said Mark Grant, chief global strategist at B. Riley FBR, in a note.

Equities soared, surging in the wake of the Fed’s statement and during Powell’s news conference before trimming gains, but still ending sharply higher. The S&P 500 SPX, +1.55% closed up 1.6% at 2,681.05, a nearly seven-week high. The Dow Jones Industrial Average DJIA, +1.77%  ended 434.90 points higher at 25,014.86, a gain of 1.8%.

The U.S. dollar may have bore the brunt of the market reaction, selling off across the board after the Fed’s dovish surprise. The euro EURUSD, +0.1219%  and the Japanese yen USDJPY, -0.26% both strengthened sharply, leaving the ICE U.S. Dollar Index DXY, -0.20% a measure of the currency against a basket of six major rivals, erasing gains to turn lower.  

How a dovish Fed sparked a stock-market rally and tanked the U.S. dollar, MarketWatch, Jan 31