NEW YORK (Reuters) – The U.S. dollar fell Wednesday, after the Federal Reserve said it does not expect interest rates to rise through the whole of 2023, contrary to market expectations.
The dollar index fell 0.5% to 91.405 after the Fed’s comments.
The greenback had reversed its slide in recent sessions on a rise in U.S. Treasury yields due in part to growing expectations that the Fed could tighten rates earlier than expected. expect economic recovery to be faster than expected.
U.S. Treasury 10-year yields hit a 13-month high early in the session but ultimately stood at 1.647%.
In a statement after the Fed kept interest rates stable, 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 subsides, and to keep its target interest rate close to zero for years. to come.
That was in contrast to what the eurodollar futures market was proposing prior to the Fed report, almost entirely priced in rate hikes by December 2022 and three increases in 2023.
While the improvement in the Fed’s economic outlook did not immediately change policymakers ’expectations for flat rates, the weight of opinion has shifted. Seven out of 18 officers now plan to raise rates in 2023, compared to five in December.
Fed Chairman Jerome Powell also said at a news conference that the U.S. central bank is not looking at dates to reduce its asset purchases yet.
If Powell had piled in his bond purchases, that would have been a sharper sale and an extra spike that would have pushed the dollar higher.
“The advancement of the mid-term forecast for the first phase of the walk-in to 2023 would not have been reported to Fed Chairman Jerome Powell,” ING said in a research note.
“Marking an earlier move would have given the bond market more arms to push yields much higher just when Powell has expressed concern that there is a ‘chaotic position in markets’. or persistent tensions in financial circumstances which threaten the achievement of our objectives’. ”
Following Fed’s report, eurodollar futures pledged back on a flat rate hike by December 2022. It has so far priced up 90% by March 2023, but has yet to show three rounds for that year all.
The euro rose 0.7% against the dollar to $ 1.1978.
Against the yen, the dollar fell 0.1% to 108.87 yen.
That said, analysts do not see Fed’s report as a catalyst for a resumption of the weak dollar movement seen at the beginning of the year.
“I don’t think this is definitely going to return the dollar to a recession,” said Mazen Issa, senior money analyst at TD Securities.
“In order for the euro to resume it needs to mobilize the global movement. The European economy is far from matching growth prospects in the US. ”
Reporting by Gertrude Chavez-Dreyfuss; Additional statement by Jessica DiNapoli; Edited by David Gregorio and Alistair Bell