Dollar Rides Fed Rate Hike Expectations to Session Highs
The dollar rose against a basket of major currencies amid expectations that the U.S. Federal Reserve will raise rates for the first time this year on Wednesday.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.47% to 89.90.
The Federal Reserve Open Market Committee (FOMC) meeting got underway Tuesday, with a decision on monetary policy expected to following Wednesday, accompanied by the release of the Summary of Economic Projections on inflation, unemployment and economic growth (GDP).
The “dot plot,” – shows where each FOMC member in the meeting thinks the interest rates are heading at the end of the year for the next few years and in the longer run – is expected to garner the most investor attention.
In December, the Fed’s “dot plot” indicated the median forecast was a total of three rate hikes in 2018, however, recent language among the Fed members include chairman Jerome Powell has turned hawkish, raising the prospect of a fourth rate hike for 2018.
Market participants are also likely to look beyond 2018 to gauge FOMC members’ appetite to adopt a faster path to monetary policy tightening, with current expectations for the Fed’s funds rate to reach 2.7% in 2019.
“The Fed is rarely as pre-emptive as it likes to think, but both nominal and real rates are very low, so we’re sticking to our view that rates will rise each quarter this year, with three further hikes next year,” Pantheon said.
The dollar’s move higher was supported by a slump in EUR/USD to $1.2254, down 0.66%, as investors mulled a weaker-than-expected ZEW survey.
GBP/USD fell 0.14% to $1.4007, giving up some of its gains from Monday, when news surfaced that Britain and EU agreed terms on Brexit-transition deal.
USD/JPY rose 0.29% to Y106.41, while USD/CAD fell 0.04% to C$1.3072.