Dollar Rises to Two-Week High as Fed Hikes Rates, Elevates Dots

  • Euro drops to recent lows, bids and option demand may cushion
  • Dollar-yen sets 10-month high after BOJ steps up bond buys

The dollar rose strongly after the FOMC raised the fed funds target rate by 25 bps, as expected, and signaled the possibility of 3 further interest rate hikes in 2017, a bolder forecast that was perceived as a “hawkish” move by the standards of the pre-meeting debate among traders.

While the dollar posted impressive gains, foreign-exchange flows were relatively modest in post-decision trading, two traders in New York said. The dollar was higher against all of its G-10 peers and trading near highs against the yen and euro after reversing slight losses sustained ahead of the Fed decision. The dollar-yen traded above 116.75.

  • FOMC said that measures of labor slack have dropped, while overall inflation will rise to 2% over a couple of years; at the same time, it’s too early to estimate the impact of possible fiscal stimulus steps, and Fed policy is not on a preset course, Yellen said in her post-decision press conference
  • EUR/USD fell to a fresh low 1.0530 after the Fed announcement, filling bids ahead of 1.0600 and 1.0550 in the move; EUR may find support near 1.0500, where EU5.6b of strikes roll off over in the remaining two days of this week
  • Any EUR rebound may face tech resistance at the Dec. 5 high 1.0796; that level will coincide with option-related supply tied to ~EU5.1b of option expiries at 1.0800 that also roll off by the end of the week
  • USD/JPY is trading near a fresh 10-month high at 116.78; the dollar filled offers at 116.50 in the move which turned choppy as sporadic selling emerged
  • Overnight, in contrast to FOMC actions, the BOJ announced it would increase purchases of long-term JGBs in an effort to head off a rise in bond yields
  • USD also rose vs a majority of emerging market FX as the prospect of higher interest rates in the U.S. damped risk-appetite in the near-term
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