The dollar slipped against the euro shortly after the announcement of a quarter-point hike in the US central bank’s (Fed) key rate, as traders saw the Fed’s communication as a sign of relaxation.
Around 8:35 p.m. GMT, the greenback sold 0.80%, 1.0857 dollars for one euro, the lowest in a month and a half. Earlier it had fallen to $1.0912. It also fell sharply against the pound, down to 1.2335 dollars, before recovering.
The Fed decided on Wednesday to raise its key rate by 0.25 percentage points, bringing it to a range of between 4.75% and 5.00%, a first for more than 15 years.
But more than this gesture, expected by the market, the operators retained the tone of the press release that accompanied it.
It indicates that further tightening may be appropriate, a phrase that contrasts with previous Fed communications.
In February, at its previous meeting, the central bank’s Monetary Policy Committee (FOMC) had said (anticipated) that additional hikes (would be) necessary to bring inflation back to the rate of 2% per year, the target of the Fed.
For Convera’s Joe Manimbo, Wednesday’s message was dovish (referring to the dove as a symbol of more accommodative monetary policy), meaning it marked a softening of the Fed’s stance thus far.
This is a sign that the Fed may only raise its key rate by an additional quarter point before pausing, the analyst explained, in a note.
This trajectory would be significantly lower than what investors were anticipating barely a month ago, betting on a rate above 5.50%, or even 6%, by the summer.
In addition, traders noted that according to the Fed, recent developments, namely the banking crisis, are likely to tighten credit conditions for households and businesses and weigh on economic activity, hiring and inflation, a additional element likely to weaken the dollar.
This tightening of access to credit will cause US banks to do some of the Fed’s work for them, limiting the need to tighten the economy further through rate hikes, according to Marc Chandler, from Bannockburn Global Forex.
Moreover, while the markets often have a two-step reaction to the Fed’s monetary policy announcements, the orientation remained the same this time.
Indeed, the words of the president of the institution Jerome Powell during his press conference were consistent with the press release, according to the analyst.
The greenback, one of the nicknames of the dollar, is all the more penalized as traders expect the European Central Bank (ECB) and the Bank of England (BoE) to have a heavier hand than the Fed in the coming months.
Wednesday class Tuesday class
8:35 PM GMT 9:00 PM GMT
EUR/USD 1.0857 1.0768
EUR/JPY 142.58142.68
EUR/CHF 0.9960 0.9932
EUR/GBP 0.8849 0.8814
USD/JPY 131.33132.51
USD/CHF 0.9174 0.9224
GBP/USD 1.2267 1.2217