US dollar trims gains after Fed statement notes low inflation signs

[NEW YORK] The US dollar trimmed gains against a basket of major rivals on Wednesday on disappointment that the Federal Reserve did not take a more hawkish stance on interest rate increases, though stronger-than-expected US economic data buoyed the greenback.

The Fed kept interest rates unchanged, as expected, in its first meeting since President Donald Trump took office.

While the Fed painted a relatively upbeat picture of the US economy that suggested it was on track to tighten monetary policy this year, analysts said the central bank's reference to low inflation measures dampened optimism that it would take a more aggressive line on raising interest rates.

The US dollar index, which measures the greenback against a basket of six major currencies, trimmed about 0.3 per cent of its gains on the day after the Fed statement and was last up just 0.2 per cent at 99.669.

That level was near a more than seven-week low of 99.430 touched Tuesday after comments from President Donald Trump and a top economics adviser that Germany, Japan and China were engaged in devaluing their currencies to the detriment of American companies and consumers.

"The market didn't get any new insights from the statement as far as a trigger for a more hawkish Fed, and that is prompting some minor profit-taking on the dollar," said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York.

The Fed said it still expected inflation to rise to its 2 per cent target in the medium term, although it noted that market-based measures of inflation compensation are still low and survey-based measures of long-term inflation expectations are little changed. The central bank has forecast three rate increases in 2017.

The greenback remained positive on the day in the wake of the ADP National Employment Report, which showed US private employers added 246,000 jobs in January, and the Institute for Supply Management's survey showing its index of national factory activity rose to 56 last month.

"ADP just served as a reminder of America's rosier fundamentals, something that has been pushed off to the side with Washington dominating the spotlight," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The US dollar was last up 0.4 per cent against the yen at 113.23 yen, while the euro was down 0.3 per cent against the US dollar at US$1.0764. The US dollar earlier gained one per cent against the yen to a session high of 113.95 yen.

REUTERS