Dollar Plunges as Fed Sees Slower Pace for 2016 Rate Increases

  • Gauge of greenback weakens the lowest level since October
  • Central bank cites weaker global growth, financial turmoil

The dollar plunged to the lowest in almost five months Wednesday as the Federal Reserve scaled back expectations for the path of interest-rate increases in 2016, after holding its benchmark target steady.

The U.S. currency slid against most major peers in New York as the central bank cited the potential impact from weaker global growth and financial-market turmoil on the U.S. economy. The currency declined the most in one month as policy makers maintained the federal funds target rate and scaled back forecasts for further rate increases this year following a two-day meeting.

“The mantra we follow as investors is don’t fight the Fed, but it feels like what the Fed is saying now is don’t fight the market” on the rate path, said Matthew Whitbread, a Boston-based investment manager at Baring Asset Management.

Policy makers are weighing when to hike again after raising rates in December for the first time in almost a decade. Patchy growth in the U.S. and a slowdown in China roiled markets in the first few weeks of the year reduced chances for a rate increase in the near term. Officials updated their median year-end interest rate forecast to 0.875, implying two quarter-point increases in 2016, down from four forecast in December.

"This is the dovish statement that caught the market off guard," said Bipan Rai, director of foreign-exchange strategy in Toronto at Canadian Imperial Bank of Commerce’s CIBC World Markets unit. "Two hikes and moderate language surrounding the rise in inflation pressures add to bearish knee-jerk dollar reaction."

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 peers, was little changed at 1,197.42 as of 8:03 a.m. in Tokyo on Thursday, after falling 1.1 percent in New York. The greenback held steady at $1.1219 per euro and 112.72 yen after sliding more than 0.5 percent against both currencies on Wednesday.

The dollar index has weakened almost 3 percent this year, paring a 9 percent gain in 2015 and an 11 percent rally the year before.

"The dollar is weaker on comments by the Federal Open Market Committee that the global economic outlook will continue to be a headwind," said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California."They’ve reduced their expectations for future rate hikes for the next two years."

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