The dollar struggled against its peers on Thursday after the Federal Reserve maintained the view that it would raise interest rate three times in 2018 instead of the four that some currency bulls had hoped for. Fed raised rates by 25 basis points to 1.75 per cent on Wednesday and forecast at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening. The US central bank also projected three more hikes in 2019.
The greenback slipped, however, with investors who had bet on the Fed signalling four rate increases in 2018 instead of the widely anticipated three seen to have taken profits after the announcement. The dollar index against a basket of six major currencies was 0.3 per cent lower at 89.520 after dropping as much as 0.7 per cent overnight.
“The Fed hiking rates three times, and even four times, this year won’t be too big of a surprise for the currency market, which fully expects the Fed to continue normalising policy,” said Shin Kadota, senior strategist at Barclays in Tokyo. “On the other hand, there is still room for the market to price in other central banks normalising policy. The dollar needs a big surprise to be jolted higher, something the Fed meeting did not provide,” Kadota said.
The Bank of England’s meeting later on Thursday is now in focus, with market participants keeping a close eye on the central bank’s policy views after robust British wages data cemented expectations that the central bank will raise rates as early as May. The pound extended its overnight rally and rose to a six-week high of $1.4163. The dollar was down 0.3 per cent at 105.715 yen after slipping about 0.5 per cent the previous day.
The euro added 0.2 per cent to $1.2365 following a gain of 0.8 per cent overnight. The Australian dollar, which rallied more than 1 per cent overnight against a flagging greenback, was up 0.1 per cent at $0.7774.