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US Federal Reserve decision boosts Australian dollar

Credit: CY_swear_020314_5884

The US Federal Reserve provided investors with a sigh of relief overnight when it kept interest rates on hold and guided for as many as two more 25 basis point hikes by the end of the year.

Indeed, the Fed Reserve, which acts as the central bank in the United States, was not expected to hike interest rates at this two-day meeting which concluded on Wednesday night (Australian time). However, investors around the world were cautious of how many times it would look to increase them before the conclusion of 2016.

Initially, the policymakers hinted at as many as four hikes in 2016, adding to its 25 basis point hike in December 2015. However, a volatile and uncertain start to the year for equity markets around the world, a plunge in oil prices as well as fears of another potential US recession, prompted a rethink.

It said: “The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”

However, it also noted the risks facing the global economy and dimmed its economic growth outlook for the year from 2.4% to about 2.2%, reducing its expectations to just two rate hikes this year.

It was arguably the right call to make: on the one hand it didn’t want to spook the markets by sticking to its original plans to hike rates as quickly as first suggested; but it also didn’t want to spook the market by dialling its plans back altogether.

While investors around the world have cheered the decision, with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) also rising about 1.3% today, it’s probably not what the Reserve Bank of Australia wanted to hear.

The Australian dollar surged towards US76 cents again (from below US75 cents) following the Fed’s decision, which puts the RBA under even more pressure to cut interest rates in order to weaken the currency. It has already risen from US68.28 cents in January and is now getting into uncomfortable territory as far as our exporters are concerned.

The Reserve Bank’s board won’t meet for another two-and-a-half weeks and it has already indicated its hesitance to lower interest rates any further. While it seems unlikely it will cut interest rates in April, if the Australian dollar keeps rallying, a rate cut would well be on the agenda in the coming months.

Foolish takeaway

Unlike in the United States where interest rates will likely rise progressively this year, Australia’s own cash rate is unlikely to rise anytime soon. As such, it’s a good idea to at least consider some of the better dividend shares on the ASX, including Telstra Corporation Ltd (ASX: TLS) and Retail Food Group Limited (ASX: RFG) – both of which are fully franked.

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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