The dollar climbed to its highest level in nearly five weeks after the Federal Reserve raised interest rates and signaled more hikes ahead, pushing the euro and British pound lower. The greenback also firmed against the yen as traders braced for a Bank of Japan decision on Friday.
The dollar rose against a basket of currencies on Wednesday after the Federal Reserve raised interest rates and flagged further increases in borrowing costs in coming months. The dollar index rose 0.3% to 99.961, its highest level in nearly five weeks.
Fed lifts rates, signals more hikes ahead
The Fed lifted its benchmark rate to the 3.75%-4.00% range, with new central bank chief Kevin Warsh joining a unanimous decision. New policy projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year, with only two expecting rates to hold steady. The projections point to the policy rate reaching the 4.00%-4.25% range by the end of this year, ending 2027 at the same level.
Karl Schamotta, chief market strategist at Corpay in Toronto, said the unanimous vote and upgraded rate projections should restore confidence in the Fed's commitment to fighting inflation and remove a headwind that had kept the dollar restrained.
Euro and pound slip as dollar firms
The euro was 0.3% lower at $1.1502. Sterling fell 0.5% to $1.34155 after data showed British inflation accelerated to a five-month high in August, a day before the Bank of England is expected to leave rates steady.
Yen tests support ahead of BOJ decision
The dollar rose 0.3% against the yen to 155.49 yen.
The yen started September strong on hawkish expectations for Japanese rates, joint intervention by Japan and the U.S., and speculation that Japanese investors are repatriating capital, but it has floundered in recent sessions as the dollar firmed. Traders see an 80% chance the Bank of Japan will hike rates on Friday, and have priced in two 25-basis-point hikes by the end of January.
According to Reuters: "The yen's path will continue to depend heavily on interest rate differentials," said David A. Meier, economist at Julius Baer. Julius Baer revised its USD/JPY forecast to 155, citing scepticism that the Bank of Japan can satisfy the pace of tightening currently priced in by markets.
A long rally in China's yuan has lost momentum at around 6.71 to the dollar, but the currency is holding its gains despite a widening gap between low Chinese yields and rates elsewhere.
Source: Investing.com
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