US Dollar slips as Fed raises interest rates
The US Dollar’s recent rally came to an end, as the Federal Reserve’s long-expected decision to raise interest rates by 0.25% was announced, falling back to pre-7 December levels on Wednesday against a basket of six other leading currencies, including the GBP and EUR.
Investors had been expecting a larger hike this year, followed by a steady increase over the next two years, but the Fed’s rate predictions remained unchanged from September.
USD/EUR Live Chart
Dollar Futures Drop
March U.S. Dollar Index futures settled at 93.024, down 0.676 or -0.72%.
The interest rate hike was accompanied by broadly positive news from the Federal Reserve, with the US central bank predicting ‘solid’ growth over the next two years, running at 2.5% in 2017 and 2018 – a figure bolstered by the recent tax cuts passed by the Senate. Alongside this, the US unemployment rate has fallen to 4.1% – the lowest level since 2001.
Despite these positive signs of a healthy economy, the US Dollar was hit by disappointment from investors who had been expecting a more aggressive rise in interest rates over the next two years. While three increases had already been priced in by the markets, a fourth would have forced a further revision – impacting the dollar positively.
However, two votes in the Fed against the rate hike are a signal to investors that a fourth hike is less likely now, prompting them to sell.
Commodities Benefit
As a result of the unexpected dove-ish approach to interest rates, yield-hungry investors abandoned the Dollar in favour of commodities, in search of higher returns. After the announcement, the Dollar continued to slide during Fed Chairwoman Janet Yellen’s press conference speech, in which she justified the gradual rate rises to guard against faster rises in future.
In addition to this, earlier economic news demonstrated slowing inflation, which may make it harder for the Federal Reserve to bring in further interest rate rises later in the year, slowing to 1.7 percent in November from 1.8 percent in October.
Gold was the primary beneficiary from the Dollar’s slip, experiencing a surge in its value to 1260.3, reversing a period of decline that began in November. This was precipitated by the Dollar’s decline, which sent investors running to the commodity.