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The dollar surged to a fresh two-decade high on Wednesday after the Federal Reserve raised interest rates by another 75 basis points, as expected, and signaled more large increases at its upcoming meetings.
The Fed’s new projections showed its policy rate rising to 4.4 per cent by the end of the year, before peaking at 4.6 per cent in 2023 to curb uncomfortably high inflation. Rate cuts are not expected until 2024.
The dollar index hit a fresh 20-year high of 111.63 and was last up 1.1 per cent at 111.42.
The euro, the largest component in the dollar index, dropped to a 20-year low, hitting $0.9810 . Europe’s single currency last changed hands at $0.9837, down 1.3 per cent.
Against the yen, the dollar posted minor gains compared to other currencies, rising 0.5 per cent to 144.41 yen. Traders were wary of pushing the dollar higher given the threat of Japan intervention to boost the yen.
“They (the Fed) have a brief window to act aggressively, and they seem eager to use it,” said Jan Szilagyi, co-founder and CEO of Toggle AI, an investment research firm.
“There is another reason to frontload the hikes. Public and market tolerance for tighter monetary policy is far higher with the unemployment rate below four per cent, a historic low.”
Meanwhile, Wall Street stocks, which had been in positive territory prior to the 1800GMT Fed statement, tumbled into the red after the announcement.
All three major indices were in negative territory, with the broad-based S&P 500 down 0.6 per cent at 3,834.10.
The latest Fed statement included interest rate projections for the end of 2023 and 2024 that are higher than the previous forecasts, signaling the US central bank now sees the need for a more prolonged monetary tightening cycle in light of inflation trends.
“Overall, the message from the (Fed) remains hawkish, with the Fed committing to further rates hikes to combat inflation and keep inflation expectations anchored,” said a note from High Frequency Economics. — Reuters, AFP
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