Dollar surges after Fed signals more rate hikes ahead

The U.S. dollar rallied in early European trade Thursday, boosted by the Federal Reserve’s hawkish projection of more tightening this year, while the euro weakened ahead of the latest European Central Bank policy meeting.

At 02:05 ET (06:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 102.835, recovering from the previous session’s four-week low.

Hawkish Fed supports the dollar

The U.S. currency bounced after recent losses following the conclusion of the latest policy-setting meeting of the Federal Reserve on Wednesday, with the central bank deciding to pause its year-long policy tightening cycle, as widely expected.

However, the Fed also signaled in new economic projections that rates will likely rise by another half of a percentage point, i.e. two more hikes of 25 basis points, by the end of this year.

“We think signalling another hike in the 2023 projections would trigger a quite substantial dollar rally as markets see the July meeting as the most likely date for the next rate increase,” said analysts at ING, in a note.

ECB expected to hike later

EUR/USD fell 0.2% to 1.0817, suffering from the resurgence of the dollar ahead of the European Central Bank’s next rate decision later in the session, with another 25 basis-point hike widely expected.

Such a move would be the eighth straight increase of that size, and the ECB is also expected to signal more hikes to come in the months ahead following President Christine Lagarde’s recent comments that “there is no clear evidence that underlying inflation has peaked.”

Yen hits seven-month low

USD/JPY rose 0.8% to 141.14, climbing to levels not seen since November last year after traders drew the distinction between the hawkish commentary from the Federal Reserve and what is likely to come from the Bank of Japan on Friday.

The BoJ is widely expected to maintain its ultra-dovish stance and yield curve control settings as it attempts to support the country’s nascent economic recovery.

However, a Japanese government spokesperson did try to offer vocal support for the yen, saying volatile currency market moves were undesirable and authorities would take “appropriate” action as needed.

Elsewhere, GBP/USD fell 0.1% to 1.2652, NZD/USD fell 0.3% to 0.6189 after data showed New Zealand’s economy shrank into a technical recession in the first quarter, while USD/CNY fell 0.2% to 7.1529, with the yuan trading near a six-month low after the People’s Bank of China cut interest rates on its medium-term loans on Thursday.

Source: https://www.investing.com/news/forex-news/dollar-surges-after-fed-signals-more-rate-hikes-ahead-3105895