The US dollar crumbled on Wednesday after the Federal Reserve signaled it would keep interest rates unchanged throughout 2019, thereby backtracking on the two rate hikes it predicted in December.
Traders dumping US dollars in recent days amid speculation that the Federal Reserve would sound dovish at Wednesday’s meeting were entirely vindicated after the central bank ditched its December projection for two interest rate hikes this year and said it now sees rates unchanged until 2020.
Though markets were correct in not expecting any increase this month (US interest rates remain at 2.25-2.5 percent), they had priced in at least one further quarter-point hike before year-end, which meant that violent price corrections were unavoidable across all asset classes on Wednesday.
The dollar’s losses were significant and spread far and wide.
In the hour following the release of the Fed’s new projections, the US Dollar Index (a measure of broad US dollar strength) dropped by 0.7 index points to a 6-week low of 95.78.
In emerging markets, too, there were significant moves. Notable pairs include USD/RUB (63.68) and USD/MXN (18.75), both of which dropped suddenly and now trade at levels not seen since the third and fourth quarters of last year.
Markets had, it seems, been preparing for a dovish surprise: after nearing a 20-month high on March-7, the Dollar Index lost value in 7 of 8 trading days leading up to Wednesday’s announcements.
The Fed’s reassessment of future monetary policy reflects concerns over economic growth, which appears to be slowing domestically and globally; lower energy prices, which keep inflation suppressed; and risks originating from overseas, which likely include Brexit.
In a separate announcement, the Fed said it will begin slowing the pace of balance sheet reduction in May.
It may be that these developments are the catalyst for the “gradual long-term bearish [dollar] trend” predicted by ING researchers earlier this year (CIBC’s team predicted something similar), but with the world’s major central banks seemingly competing to lower interest rate expectations, the dollar’s next move is difficult to predict.
A major currency that had an even worse day than the dollar was the British pound. Post-Fed gains weren’t enough to eradicate a big afternoon fall that followed a statement from EU Council President Donald Tusk, who put a no-deal Brexit back on the table after he said that the EU would agree to the Article 50 extension sought by the UK government only if British MPs first backed the current withdrawal agreement—the one that has twice been defeated by large parliamentary majorities.
Sterling was last seen trading half a cent lower against the dollar at levels near $1.32, and was down by a hefty 1.3 cents against the euro, at €1.1562. Judged by the standards of recent months, sterling does, however, remain at elevated levels relative to all G10 currencies.