Fed Rate Hikes, Slightly Stronger Dollar
The US Dollar climbed higher against the basket of major currencies on Wednesday following the increase in benchmark interest rates made by the Federal Reserve for the first time in almost 10 years. The policy-setting committee of the US central bank increased their benchmark rate by a quarter percentage to 0.25 and 0.50 percent, which ended the debate on whether the strength of the economy can handle the increasing borrowing costs.
Although the pace of the interest rate hikes remains unchanged from the previous projections of the Fed, some experts said that the market predictions for fewer rate hikes in 2016 resulted in a slightly stronger dollar.
Chris Gaffney, the president of EverBank World Markets in St. Louis, said, “The Fed is more hawkish than the market has been on where interest rates will be at the end of 2016.”
The Fed emphasized that this was the tentative start of the tightening cycle. They also said that they will be putting a premium for monitoring inflation, which is set below target.
While Fed’s move affected the dollar initially and led the euro to hit their session high, the dollar quickly recovered as traders viewed the pace of the rate hikes as completely hawkish. The euro was down 0.24percent against the greenback which is at $1.09070.
Vassili Serebriakov, currency strategist at BNP Paribas in New York, said, “Our takeaway is that the Fed has started the cycle, it’s going to be a gradual cycle, but the markets had already priced for a far more dovish path than the Fed is signaling.”
While the dollar recovered modestly, it failed to retrace the highs it hit following the decision of the Fed. The dollar index, which is measured against the basket of 6 major currencies, was up 0.21 percent at 98.426.