US dollar tumbles after Fed signals gradual hikes, Dutch election exit poll

[NEW YORK] The US dollar posted steep losses against major currencies on Wednesday after the Federal Reserve raised interest rates as expected but signalled a more gradual pace of monetary tightening this year than many in the market anticipated.

The greenback fell to a five-week low against the euro, a four-week trough versus the Swiss franc and a two-week low against the yen and sterling.

The euro and Swiss franc added to gains against the US dollar after initial exit polls released in the Netherlands' election showed Prime Minister Mark Rutte's VVD Party won the most seats in parliamentary elections.

The anti-Islam Party for Freedom of Geert Wilders won just 19 seats in the 150-seat house of representatives.

The euro rose to US$1.0740 while the US dollar fell to 0.9980 franc against the Swiss currency. The greenback also fell to its weakest in two weeks versus sterling.

The election results in the Netherlands were additionally bullish for the euro because they likely reduced the odds anti-European Union candidate Marine Le Pen would win in France, said Deutsche Bank's director of foreign-exchange strategy Sebastien Galy.

"As the so called populist wave hits a door in the Netherlands, the odds of Marine Le Pen's winning the second round dropped," he said in a note to clients.

The Fed on Wednesday lifted the target overnight interest rate by 25 basis points to a range of 0.75 per cent to one per cent.

But further rate increases would only be "gradual," the Fed said in its policy statement, with officials sticking to their outlook for two more rate hikes this year and three more in 2018. The Fed lifted rates once in 2016.

Prior to the Fed's decision, investors had been pricing in at least four rate hikes this year.

"In largely sticking with its previous median interest rate projections, the Federal Reserve expressed a lack of conviction in the economic relief rally that has lifted global financial markets to historic levels," said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.

"After a massive buildup in long positions earlier this week, currencies are in full reversal mode, with the dollar falling aggressively."

The US dollar index fell to a one-month low and was last at 100.560, down 1.1 per cent.

REUTERS