The dollar slid Wednesday after the U.S. Federal Reserve raised its key rate by a quarter of a percentage point, as widely expected, and pointed to just one more rate hike this year.
The Fed projected at least one additional interest rate increase of 25 basis points by the end of 2023, but suggested that could represent at least an initial stopping point for the rate hikes.
The dollar index last fell 0.63% to 102.500, with the euro up 0.87% to $1.0861. The dollar fell 0.82% against the Japanese yen, while Sterling was last trading at $1.2268, up 0.41% on the day.
In a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer says that “ongoing increases” in rates will likely be appropriate. That language had been in every policy statement since the March 16, 2022 decision to start the rate-hiking cycle.
“I think the Fed did take the path of least resistance here, hiking but also providing a relatively dovish outlook on rates over the year ahead. That essentially gives markets what they were looking for,” said Karl Schamotta, chief market strategist at Corpay.
Markets had projected a quarter-point rise in U.S. rates, but investors were also paying close attention to Fed Chair Jerome Powell’s comments about the crisis that has rattled global banks this month.
“Our banking system is sound and resilient with strong capital and liquidity. We will continue to closely monitor conditions of the banking system and are prepared to use all of our tools as needed to keep it safe and sound,” Powell said at the news conference following the Fed’s rate hike announcement.
The Fed, together with other major central banks, has made provisions to grease the wheels of the financial system, after the failure of several smaller U.S. lenders and the implosion of Credit Suisse at the weekend unleashed huge market volatility and a rout in banking stocks and bonds in particular.
The Fed’s “dovish hike” should mean a lower dollar in the coming weeks and days, provided that bank liquidity issues remain at bay, Wells Fargo analysts wrote in a research note.
The pound rose after data showed UK inflation came in much hotter than expected in February, which puts Bank of England policymakers in a tough position when they meet on Thursday. The Australian dollar rose 0.29% versus the greenback to $0.669, while New Zealand’s kiwi rose 0.57% versus the greenback to $0.623. In cryptocurrencies, bitcoin last fell 2.5% to $27,488.00, after hitting a nine-month peak on Monday.
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