The Federal Reserve gave currency market volatility another boost, this time triggering a dramatic collapse in the US dollar by giving markets more unexpected signals about future US monetary policy. Against a currency basket, the greenback suffered one of its biggest one-day falls in years after minutes from the Fed’s earlier meeting suggested policymakers were still several months away from starting to reduce monetary stimulus. The headlines have allowed the euro to escape selling amid new political uncertainties in the euro area. Instead the single currency has shot from three-month lows to near three-week highs against the US dollar on the back of an incredible jump of around 3.5 per cent. The euro is also close to four-month highs against the pound although sterling also rallied sharply against its US rival in response to the Fed policy updates. A US dollar collapse and an upgrade to Japanese economic growth from the Bank of Japan pushed the yen sharply higher despite Japanese policymakers sticking to their extra-large monetary stimulus agenda.

Sterling

The pound dramatically rallied against the US dollar following fresh monetary policy guidance from the Federal Reserve which saw the greenback dive across the board. However, that unexpected turnaround has done little to support sterling in other cases with investors still concerned about the direction of UK monetary policy in front of next week’s minutes from the Bank of England’s earlier meeting. Unable to keep pace with the euro’s advance against the US dollar, sterling is now within striking distance of four-month lows against the single currency and one-month lows versus the yen.

Euro

Political risks are still brewing in the eurozone but don’t seem to be working their way into currency markets just yet with the euro one of the main beneficiaries from the US dollar’s astounding plunge. The euro climbed some 3.5 per cent against the US dollar after negative comments from Federal Reserve Chairman. Still, investors are keeping a close eye on the political landscape in the euro area which, until recently, has been relatively danger-free.

Dollar

The US dollar collapsed in dramatic fashion, suffering one of its biggest one-day falls in years on a trade-weighted basis, after Chairman Ben Bernanke warned investors that the Federal Reserve will respond if recent market volatility persists and pushes up lending rates which would undermine its inflation and employment goals. The comments landed late at a time when liquidity is thinner, which tends to exaggerate currency moves. Nonetheless, Bernanke’s remarks, which followed more dovish-than-expected minutes, poured cold water over bets in favour of the Fed reducing its quantitative easing programme in September.