The dollar’s initial rally failed to gain traction because ahead of the Fed’s announcement, speculators were probably betting on as many as four rate hikes this year.
The U.S. Dollar went on a roller coaster ride against a basket of currencies on Wednesday after the Federal Reserve raised its benchmark interest rate for the first time in 2018. The Greenback traded lower early in the session, turned positive immediately after the rate hike at 1800 GMT, but then settled lower for the session.
June U.S. Dollar Index futures finished the session at 89.369, down 0.585 or -0.65%.
To recap the day’s events, the Federal Open Market Committee on Wednesday announced it would raise interest rates 25-basis points or 0.25 percent, its first hike in 2018. Additionally, it upgraded its outlook for the U.S. economy, citing job gains and low unemployment. Although the central bank expects gradual rate hikes over the long-term, its forecast remained at three hikes in 2018.
The dollar’s initial rally failed to gain traction because ahead of the Fed’s announcement, speculators were probably betting on as many as four rate hikes this year. The dollar’s weakness could also be a sign that investors are betting on improving global economic growth and the possibility that other major central banks would scale back their monetary stimulus and raise rates gradually themselves.
Euro and Japanese Yen
The Euro and Japanese Yen rallied after the Fed’s announcement. Just a day earlier, the Euro was testing its lowest level since March 1. With the Fed’s plan revealed in its monetary policy statement, bullish traders will likely return to the Euro as they begin to price in a reduction in stimulus and a possible earlier-than-expected rate hike.
The EUR/USD settled at 1.2338, up 0.0097 or +0.79%.
The Dollar/Yen was under pressure on Wednesday as sellers returned after a three day short-covering rally. Although the rate hike increased the spread between U.S. Government Bond yields and Japanese Government Bond yields, investor demand for safe haven assets made the Yen a more desirable asset. The selling was likely driven by concerns over a trade war and weaker U.S. equity markets. Additionally, investors may also be pricing in the possible resignation of Japanese Prime Minister Shinzo Abe, which would signal the end to Abenomics and a cheaper Japanese Yen.
The USD/JPY settled at 106.037, down 0.493 or -0.46%.
The British Pound rose against the U.S. Dollar on Wednesday after data showed U.K. wages grew at their fastest pace in more than two years. With this news, speculators increased bets that the Bank of England would raise interest rates as early as May.
The GBP/USD settled at 1.4140, up 0.0144 or +1.03%.
Oversold conditions and a weaker U.S. Dollar helped trigger a strong short-covering rally by the Australian Dollar. The rebound rally from a three-month low of .7672 helped the AUD/USD settle at .7765, up 0.0083 or +1.08%.
Despite the solid performance, the Aussie remains vulnerable if President Trump’s expected sanctions against China leads to retaliation from its biggest trading partner.