US Dollar Rises as the Federal Reserve Raises Interest Rates

The US dollar rose on Thursday as markets absorbed the widely expected rate hike decision of the Federal Reserve and the central bank’s decision to go on with its plans to gradually tighten monetary policy into next year.

The US dollar index, which measures the greenback against a basket of other currencies, gained 0.4 percent to $94.28.

Against safe-haven yen, the dollar climbed 0.2 percent to 113.03.

The greenback was up 0.1 percent to 6.8877 against the yuan after the People’s Bank of China (PBOC) set the yuan reference rate at 6.8642 against Wednesday’s fix of 6.8571.

The euro meanwhile, fell 0.4 percent to 1.1690 against the dollar.

The sterling also weakened, with the pound-dollar pair slipping 0.2 percent to 1.3131 as investors’ confidence remained dull over the outlook for Brexit talks between the US and the European Union.

Fed Raise Rates, Sees One More Hike in 2018, Three for 2019

The Fed lifted interest rates on Wednesday and kept its monetary tightening plans, as it sees that the US economy would have at least three more years of growth.

Fed policymakers raised the benchmark overnight lending rate by a quarter point to a range of 2.00 percent to 2.25 percent. This is the central bank’s third rate hike this year and its eight since 2015.

As regards future rate hikes, the Fed forecasts the next increase in December, three more in 2019, and one in 2020.

The bank’s 2018 and 2019 projections remained unchanged. It still sees the federal funds rate at 2.4 percent by the end of 2018, the same estimate from June, while it kept its 2019 forecast at 3.1 percent.

In its statement, the Fed indicated that it is ending its accommodative stance, although Fed Chairman Jerome Powell said the change does not suggest any change in its likely course toward normalizing monetary policy, but instead it was a sign that policy is proceeding in line with their expectations.

Some traders interpreted the central bank’s end of the era of accommodative monetary policy to mean that it might be nearing to the end of its monetary tightening cycle.  

The Fed put in no substitute language for the removed accommodative wording in its statement. The word’s accuracy has weakened since the central bank started hiking rates in 2015 from an almost zero level, and its deletion means the Fed now considers rates near neutral.        

While Powell did not see a surprising rise in inflation, policymakers adjusted their outlook for US economic growth this year and next.

The Fed expects the economy to grow at faster-than-expected 3.1 percent this year and keep on expanding moderately for at least three more years, amid continued low unemployment and steady inflation close to its 2 percent target.

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