Dollar Surges as Fed Stays on Course for Rate Hike by Year-End

  • USD up vs most G-10 as hawkish stance traps dollar shorts
  • Balance sheet normalization is set to start in October

The dollar surged, advancing more than one percent off its session low, after Federal Reserve officials maintained their forecasts for one more interest-rate increase this year and three additional hikes in 2018, while leaving the policy rate unchanged.

The greenback was higher versus a majority of its G-10 peers, climbing as much as 0.7 percent after earlier posting declines of about 0.4 percent in the run up to the Fed’s announcement. Trading flows were brisk and choppy as the dollar dropped to a fresh low versus several peers just as the decision was announced, only to reverse sharply as traders assessed the overall tone of the statement to be more hawkish than anticipated.

  • The Fed said it will begin its balance sheet reduction in October, and indicated recent hurricanes may not have a long-term impact on the economy.
  • The Fed “not blinking on the December rate hike is supportive for the USD, given market doubts,” said Shaun Osborne, chief FX strategist at Scotia Bank in Toronto
  • Today’s FOMC will provide a boost for the USD as markets reprice a higher chance of a December rate hike after toning down their expectations earlier, says Sireen Harajli, a foreign-exchange strategist at Mizuho Bank Ltd. in New York
  • Prior to the Fed decision, traders and analysts speculated that recently weak economic data and subdued inflation may see the Fed shift to a more patient stance while assessing the impact of recent hurricanes
  • EUR/USD fell to a fresh low for the day at 1.1862 as the Yellen press conference moved along. Earlier, EUR climbed as high as 1.2033 as markets initially reacted to the Fed decision to keep rates on hold. EUR filled layered bids down to 1.1900 as it dropped the most in a month and a half. Technical support may be at the Sept. 14 low of 1.1838 or the Aug. 31 low at 1.1823
  • USD/JPY rose to a fresh high at 112.53 after falling to as low as 111.12 in choppy trading; pair extended gains beyond technical resistance from the 200-DMA at 112.22 while soaking up offers clustered around 112.00 with ease. JPY defensive tone may be reinforced as the BOJ concludes its policy meeting Thursday, where it’s likely to reiterate its plan to anchor rates near zero, despite policy divergence with some of its G-10 peers
  • GBP/USD fell to a new daily low at 1.3453, down more than 2 cents in around an hour from a high of 1.3657
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