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 7:15 p.m. GMT, the greenback sold 1.05%, 1.0883 dollars for one euro, the lowest for a month and a half. Earlier it had fallen to $1.0912.
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 the Fed believes 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.