US dollar surges as Fed stays on course for third rate hike by year end

The US dollar surged, advancing more than 1 per cent off its session low.
The US dollar surged, advancing more than 1 per cent off its session low. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - The US dollar surged on Wednesday (Sept 20), advancing more than 1 per cent off its session low, after Federal Reserve officials maintained their forecasts for one more interest-rate increase this year and three additional hikes in 2018, while leaving the policy rate unchanged.

The greenback was higher versus a majority of its Group of 10 (G-10) peers, climbing as much as 0.7 per cent after earlier posting declines of about 0.4 per cent in the run-up to the Fed's announcement. Trading flows were brisk and choppy as the dollar dropped to a fresh low versus several peers just as the decision was announced, only to reverse sharply as traders assessed the overall tone of the statement to be more hawkish than anticipated.

The Fed said it will begin its balance sheet reduction in October, and indicated that recent hurricanes may not have a long-term impact on the economy.

The Fed "not blinking on the December rate hike is supportive for the US dollar, given market doubts", said Shaun Osborne, chief foreign-exchange strategist at Scotia Bank in Toronto.

Wednesday's Federal Open Market Committee meeting will provide a boost for the US dollar as markets reprice a higher chance of a December rate hike after toning down their expectations earlier, says Sireen Harajli, a foreign-exchange strategist at Mizuho Bank in New York.

Prior to the Fed decision, traders and analysts speculated that recently weak economic data and subdued inflation may see the Fed shift to a more patient stance while assessing the impact of recent hurricanes.

EUR/USD fell to a fresh low for the day at 1.1862. Earlier, the euro climbed as high as 1.2033 as markets initially reacted to the Fed decision to keep rates on hold.

The Japanese yen's defensive tone may be reinforced as the Bank of Japan concludes its policy meeting on Thursday, where it is likely to reiterate its plan to anchor rates near zero, despite policy divergence with some of its G-10 peers.

The GBP/USD fell to a new daily low at 1.3453, down more than two cents in around an hour from a high of 1.3657.