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US dollar surges after Fed raises rates, signals faster rate hike pace

Thursday, December 15, 2016 - 07:01

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The US dollar hit its highest level against a basket of major currencies in nearly 14 years on Wednesday after the Federal Reserve raised interest rates for the first time this year and signalled a faster pace of increases in 2017.

[NEW YORK] The US dollar hit its highest level against a basket of major currencies in nearly 14 years on Wednesday after the Federal Reserve raised interest rates for the first time this year and signalled a faster pace of increases in 2017.

The US dollar index hit 102.350, its highest level since early January 2003, after the US central bank raised the target federal funds rate by 25 basis points to between 0.50 per cent and 0.75 per cent and projected three rate hikes next year from two as of September.

The index, which gained about 1.3 per cent, measures the US dollar against a basket of six major currencies. The Fed's last hike was a year ago, when it increased rates from the zero lower bound reached during the 2007-2009 financial crisis.

All 120 economists in a recent Reuters poll had expected Wednesday's rate hike. Of more significance to markets were new forecasts for future rates. Analysts said that just one additional rate increase projected into next year, combined with a cautious tone in the policy statement, boosted the US dollar without sending it excessively higher.

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Market voices on:

"The rise in the US dollar is really being driven by the shift from two to three hikes next year, which obviously isn't priced by the market," said Ian Gordon, FX strategist at Bank of America Merrill Lynch in New York. "The overall tone of the statement is generally still somewhat cautious," Mr Gordon added.

He cited the Fed's reference to risks to the economic outlook as having been roughly balanced, as well as discussion of the shortfall in inflation, as examples.

The euro fell about 1.2 per cent against the US dollar to US$1.0497, its lowest level since mid-March of last year, easing from a six-day high of US$1.0669 touched before the Fed decision. The US dollar rose nearly 2 per cent against the yen to a 10-month high of 117.38 yen.

The US dollar hit a more than 10-month high against the Swiss franc of 1.0223 francs. Sterling fell about 1 per cent against the US dollar to a nearly two-week low of US$1.2530.

"The game was higher US yields, which has been in place for some time, a higher US dollar against core defensive currencies like the euro and the yen, and that trend persists," said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York, on the Fed decision.

REUTERS

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