Dollar Climbs After Federal Reserve Rate Hike to Counter Persistent Inflation
Federal Reserve's Rate Decision and Market Impact
By Saqib Iqbal Ahmed
NEW YORK, Sept 16 (Reuters) - 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.
Details of the Rate Hike
The Fed lifted the benchmark interest rate to the 3.75%-4.00% range, with new U.S. central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration's inability so far to control inflation.
Policy Projections and Future Outlook
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 of them seeing rates remaining stable from here. Warsh apparently again did not submit a rate projection.
The Fed's new policy statement and economic projections show a central bank opening the door to tighter monetary policy through next year, with the policy rate rising to the 4.00%-4.25% range by the end of this year and ending 2027 at the same level.
Market Reactions and Analyst Commentary
"Today’s decisive hike—supported by all FOMC members and paired with an upgrade in the 'dot plot' summary of economic projections—should go a long way toward restoring confidence in the Fed’s commitment to fighting inflation, and help remove a major headwind keeping the dollar restrained," said Karl Schamotta, chief market strategist at Corpay in Toronto.
The dollar index, which measures the currency against major peers, was up 0.3% at 99.961, the highest in nearly five weeks.
"Today's unanimous vote is the clearest signal yet that the Warsh Fed is unified, data-driven, and willing to act," said David Krakauer, vice president of portfolio management at Mercer Advisors in San Diego.
Global Currency Movements
Euro and Sterling Performance
The euro was 0.3% lower at $1.1502. Sterling fell 0.5% to $1.34155. British inflation accelerated to a five-month high in August, a day before the Bank of England is expected to leave rates steady. [GBP/]
Yen Test
Recent Yen Movements
The dollar rose 0.3% against the yen to 155.49 yen.
The yen, which started September strong on a hawkish shift in expectations for Japanese interest rates, joint intervention by Japan and the U.S., and speculation that Japanese investors are repatriating capital, has floundered in recent sessions as the dollar has firmed.
Bank of Japan Policy Outlook
Traders see an 80% chance that the Bank of Japan will hike rates on Friday, LSEG data show, and have priced in two 25-basis-point hikes by the end of January.
"The yen's path will continue to depend heavily on interest rate differentials," David A. Meier, economist at Julius Baer, said in a research note.
"We recently revised our USD/JPY forecasts to 155, reflecting some scepticism that the central bank can ultimately satisfy the pace of tightening currently priced in by markets," he added.
Other Currency and Asset Movements
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. [CNY/]
In cryptocurrencies, bitcoin was little changed at $75,809, a day after tumbling 4% when the U.S. Senate did not advance comprehensive cryptocurrency legislation — a setback to digital asset companies.
(Reporting by Saqib Iqbal Ahmed and Samuel Indyk; Additional reporting by Laura Matthews and Tom Westbrook; Editing by Clarence Fernandez, Christian Schmollinger, Diti Pujara, Rod Nickel and Aurora Ellis)
