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FOREX-Dollar falters as Fed dashes early U.S. rate hike view

FOREX-Dollar falters as Fed dashes early U.S. rate hike view

· 03/17/2021 16:37
FOREX-Dollar falters as Fed dashes early U.S. rate hike view

Fed says to keep rates low through all of 2023

Eurodollar futures pare back bets on rate hikes in 2022, 2023

Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

Adds new comment, details, updates prices

By Gertrude Chavez-Dreyfuss

- The U.S. dollar fell on Wednesday, after the Federal Reserve said it does not expect to raise interest rates through all of 2023, contrary to market expectations.

The dollar index dropped 0.5% to 91.405 =USD after the Fed comments.

The greenback had reversed its slide in recent sessions on a surge in U.S. Treasury yields due in part to growing expectations that the Fed may tighten rates earlier than thought on forecasts of a faster-than-expected economic recovery.

U.S. benchmark 10-year Treasury yields hit a 13-month high early in the session but was last at 1.647% US10YT=RR.

In a statement after the Fed held interest rates steady, the U.S. central bank said it expects a rapid jump in U.S. economic growth and inflation this year as the COVID-19 crisis winds down, and vowed to keep its target interest rate near zero for years to come. nL1N2LE1D0

That was in contrast to what the eurodollar futures market suggested before the Fed statement, almost fully pricing in a rate hike by December 2022 and three increases in 2023. nL1N2LF2DW

While the improvement in the Fed's economic outlook did not immediately change policymakers' expectations for interest rates, the weight of opinion did shift. Seven of 18 officials now expect to raise rates in 2023, compared to five in December.

Fed Chairman Jerome Powell, in a press conference, also said the U.S. central bank it's not looking at dates to reduce its asset purchases just yet.

Had Powell hinted at possibly tapering its bond buys, that would have caused a much sharper sell-off and further spike which would have pushed the dollar higher.

"Bringing forward the median forecast for the first-rate hike into 2023 wouldn't have fitted Fed Chair Jerome Powell’s narrative," said ING in a research note.

"Signalling an earlier move would have given more ammunition for the bond market to push yields significantly higher just when Powell has been indicating his concern that 'disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals'."

After the Fed statement, eurodollar futures pared back bets on an interest rate hike by December 2022. It has priced in so far a 90% chance of tightening by March 2023, but still showed three hikes for the whole of that year. EDc1

The euro rose 0.7% against the dollar to $1.1978 EUR=EBS.

Against the yen, the dollar fell 0.1% to 108.87 yen JPY=EBS.

That said, analysts do not see the Fed statement as a catalyst for the resumption of the dollar's weak trend seen at the beginning of the year.

"I don't think this is necessarily going to return the dollar to a downtrend," said Mazen Issa, senior currency analyst at TD Securities.

"In order for that to resume the euro needs to gather upside momentum. The European economy is very far from matching growth expectations in the U.S."

========================================================

Currency bid prices at 4:29PM (2029 GMT)

Description

RIC

Last

U.S. Close
Previous
Session

Pct Change

YTD Pct
Change

High Bid

Low Bid

Dollar index

=USD

91.4070

91.8730

-0.50%

1.585%

+92.0060

+91.3820

Euro/Dollar

EUR=EBS

$1.1979

$1.1903

+0.65%

-1.95%

+$1.1985

+$1.1887

Dollar/Yen

JPY=D3

108.8550

109.0200

-0.19%

+5.35%

+109.3200

+108.7900

Euro/Yen

EURJPY=

130.40

129.75

+0.50%

+2.74%

+130.4400

+129.7200

Dollar/Swiss

CHF=EBS

0.9225

0.9248

-0.24%

+4.28%

+0.9296

+0.9217

Sterling/Dollar

GBP=D3

$1.3960

$1.3895

+0.48%

+2.20%

+$1.3967

+$1.3853

Dollar/Canadian

CAD=D3

1.2407

1.2448

-0.32%

-2.56%

+1.2493

+1.2406

Aussie/Dollar

AUD=D3

$0.7804

$0.7746

+0.76%

+1.45%

+$0.7810

+$0.7700

Euro/Swiss

EURCHF=

1.1051

1.1007

+0.40%

+2.26%

+1.1061

+1.1006

Euro/Sterling

EURGBP=

0.8579

0.8567

+0.14%

-4.01%

+0.8604

+0.8541

NZ Dollar/Dollar

NZD=D3

$0.7242

$0.7190

+0.78%

+0.91%

+$0.7263

+$0.7155

Dollar/Norway

NOK=D3

8.4080

8.4700

-0.65%

-2.00%

+8.5145

+8.4050

Euro/Norway

EURNOK=

10.0724

10.0967

-0.24%

-3.78%

+10.1351

+10.0735

Dollar/Sweden

SEK=

8.4473

8.4960

+0.14%

+3.06%

+8.5298

+8.4476

Euro/Sweden

EURSEK=

10.1198

10.1058

+0.14%

+0.43%

+10.1465

+10.1140


(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Jessica DiNapoli; Editing by David Gregorio and Alistair Bell)

((gertrude.chavez@thomsonreuters.com; 646-301-4124; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))