Dollar nurses losses after Fed stifles hopes of bigger rate hikes ahead

U.S. dollar banknotes are shown in this illustration taken February 14, 2022. REUTERS/Dado Ruvic/Illustration

LONDON, May 5 (Reuters) – The U.S. dollar suffered losses to a one-week low on Thursday after the U.S. Federal Reserve raised interest rates as widely expected but threw cold water on the market. idea that even bigger increases could be ahead.

Expectations of a hawkish Fed have weighed heavily on markets this year and propelled the dollar higher – against a basket of its rivals, it’s up more than 7% so far this year, in good lane for its biggest annual gains since 2015.

But the dollar weakened after the Fed announced its decision to raise interest rates by 50 basis points. Hedge funds reduced their extended long positions after Fed Chairman Jerome Powell told reporters afterwards that policymakers were not actively considering moves of 75 basis points in the future. Read more

The meeting came as no real surprise but was slightly less hawkish than expected and while a 75 basis point hike is no longer on the table for the FOMC meeting in June, inflation data and direction of the war in Ukraine will dictate the Fed’s next decisions, Mirabaud analysts said.

Fed funds futures have rallied to gain some advantage over aggressive market expectations for US rates, although another 200 basis points of hikes this year remain priced in.

The dollar index fell from a nearly two-decade high and fell 0.9% to 102.450 following the Fed’s decision. It rebounded 0.2% in early trading in London, but held at a one-week low.

The pound rose more than 1% to $1.2637 on Wednesday, but was under pressure at $1.2548 in Asia ahead of a Bank of England (BoE) meeting where traders fully priced a rise in prices. rate of 25 basis points.

The Australian dollar’s 2.2% jump was the biggest since late 2011 and followed a surprisingly hawkish turn by the Reserve Bank of Australia, which kicked off its interest rate hike cycle on Tuesday with a 25% hike. basis points larger than expected.

The Aussie was last at $0.7214, slightly lower than its overnight high of $0.7265. The New Zealand dollar jumped 1.7%, its biggest one-day rise in two years, to rest above $0.65 at $0.6534.

Reporting by Saikat Chatterjee; additional reporting by Tom Westbrook in Singapore; Editing by Hugh Lawson

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