Dollar Rebounds as Fed Holds Rates Steady

U.S. Dollar Gains Ground as Federal Reserve Maintains Interest Rates

By Saqib Iqbal Ahmed

Impact of Federal Reserve's Decision on Currency

NEW YORK, Jan 28 (Reuters) - The U.S. dollar held gains against the euro and the yen on Wednesday after the U.S. Federal Reserve kept interest rates steady, citing still-elevated inflation alongside solid economic growth, and gave little indication in its latest policy statement of when borrowing costs might fall again.

Market Reactions to the Fed's Announcement

The euro was 1% lower against the dollar at $1.19163, while the greenback was up 1.1% against the yen at 153.90 yen.

Statements from Treasury Secretary Scott Bessent

The dollar index, which measures the U.S. currency's strength against a basket of peers, rose 0.8% to 96.667. The index sank as low as 95.86 on Tuesday, its weakest since February 2022, after U.S. President Donald Trump brushed off this month's slide, emboldening dollar bears.

Concerns from European Central Bank Officials

"The Fed did nothing and did it with conviction," Karl Schamotta, chief market strategist with payments company Corpay in Toronto, said.

"In voting along 10-2 lines and subtly upgrading its assessment of labor market conditions, the central bank clearly telegraphed a desire to stay on the sidelines for now," he said.

The statement from the policy-setting Federal Open Market Committee offered no hint about when another reduction in borrowing costs might come, noting that "the extent and timing of additional adjustments" to the policy rate would depend on incoming data and the economic outlook.

"What the market will be glad to see here is that there is no sign of bowing down to Trump from the core of the committee. They are standing firm," Kyle Chapman, FX markets analyst at Ballinger Group in London, said.

"The rate path this year is wide open here, but I don't see any reason to cut until at least the summer. The economy looks solid, equities are soaring, inflation is sticking around that 2.5-3.0% range - why ease further now?," Chapman said.

BESSENT BUMP

The dollar rebounded earlier in the session after Treasury Secretary Scott Bessent reaffirmed the United States' preference for a strong dollar.

The United States has a strong dollar policy and that means setting the right fundamentals, Bessent said on Wednesday, while denying that the U.S. was intervening in currency markets to support the Japanese yen.

The dollar index is down nearly 2% for the year, after falling 9.4% last year.

Trump said on Tuesday the value of the dollar was "great", when asked if he thought it had declined too much. Traders took this as a signal to intensify dollar selling, ahead of a Federal Reserve policy decision later on Wednesday.

"The retracement/rebound in the USD is pretty logical, really, given that Bessent pushed back about as hard as you can imagine on the idea that the Trump Administration are seeking to engineer a softer USD, as well as putting to bed the market chatter that the Treasury were also seeking to prop up the yen," said Michael Brown, market analyst at ‍online broker Pepperstone in London.

The dollar has been under pressure due to several factors: expectations of continued Federal Reserve rate cuts, tariff uncertainty, policy volatility including threats to Fed independence and rising fiscal deficits, all of which have eroded investor confidence in U.S. economic stability. 

On Tuesday, the euro topped $1.2 for the first time since 2021, the pound hit 4-1/2-year highs, while the yen is set for its strongest monthly performance against the dollar since April, supported by speculation of joint Japanese-U.S. official intervention to support the Japanese currency.

ECB OFFICIALS VOICE CONCERN

The dollar's recent weakness may offer some respite to Japanese officials, but it is already a source of concern for others.

   Two European Central Bank officials said on Wednesday the strength of the euro could influence monetary policy. Austrian central bank governor Martin Kocher told the Financial Times the ECB may have to consider another interest-rate cut if the strength of the euro starts to affect the outlook for inflation.

Bank of France Governor François Villeroy de Galhau said in a LinkedIn post that policymakers were "closely monitoring the appreciation of the euro and its potential impact on lower inflation."

The euro was last down 1.1% at $1.1907, but not far from the $1.2084 high, its strongest level since June 2021, touched in the prior session.

(Additional reporting by Laura Matthews in New York, Amanda Cooper in London and Ankur Banerjee in Singapore; Editing by Sam Holmes, Aidan Lewis, Emelia Sithole-Matarise, Alexander Smith and Andrea Ricci)