Dollar falls after Fed sets stage for next year's rate hike

Dollar falls after Fed sets stage for next year's rate hike

LONDON, Sept. 23 Reuters - The dollar slipped on Thursday off one-month highs achieved after the Federal Reserve set the stage for interest rate hikes next year and a push in global market sentiment encouraged traders to foray out of the greenback.

The Fed kicked off a week of central bank meeting that will likely see Norway become the first developed nation to raise interest rates since the pandemic. The Fed has also struck a hawkish tone, setting the stage for an aggressive rollback of bond purchases in November with faster increases than analysts anticipated.

Nine of the 19 policymakers projected borrowing costs will need to rise next year, inducing markets to bring forward the timing of the first rate hike to January 2023.

The bond yields fell however, with many seeing the Fed as having left some policy wiggle room to slow down if needed. There was also relative calm on the Chinese front, although stricken developer Evergrande is unlikely to meet a bond coupon due on Thurday.

A lot of the dollar strength we saw on Monday was down to risk aversion. The Fed raised its median interest rates on January 2023 but you are still talking of a terminal rate of 1.5% - 1.7% which is ok but not situation where you get an aggressive bid for the dollar, said Peter Kinsella, director of FX strategy at UBP.

To get the dollar to yield you much you need to see the front end of the Treasury yield curve steepen and that is not happening. The gap between 5-year notes and 30-year bonds flattened after the Fed statement below 100 basis points, the lowest since July 2020, while the 2 year 10-year curve fell more than 50 bps since end-March.

At 0745 GMT the dollar index was 93.277, raising a quarter percent on the day, having down 8 cents and being as high as 93.526.

The euro was high at $1.1716, a month high, while sterling rose over a week ahead of a Bank of England meeting expected to strike a hawkish tone.

The Norwegian crown was flat against the dollar and was up 0.2% against the euro before a central bank meeting that could raise interest rates. The Norwegian crown has rallied almost 5% against the dollar in the last month and is near 3 months high against the Euro and analysts reckon significant gains are unlikely.

Long crown positioning has been significantly rebuilt in recent weeks, so the hurdle is quite high for a positive crown reaction, RBC analyst Adam Cole told clients.

The Norges Bank had already flagged the possibility of a second rate hike this year so markets would focus more on forward guidance updated, Cole noted, adding there is some risk the Norges Bank revises its projections higher again. IHS Markit Purchasing Managers Index PMI showed Australian manufacturing activity at 57.3, taking from 52 in August and neutralizing fears of the impact of COVID-linked lockdowns.