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US Dollar Posts Worst Day in 7 Weeks After Fed Cuts Interest Rate Forecasts

The US dollar was sold heavily on Thursday in the aftermath of midweek announcements by the Federal Reserve. Though the Fed raised US interest rates by 25 basis points, as widely expected, it lowered its expectations for rate hikes in 2019, to the disappointment of dollar investors.

Posted Dec 20, 2018

Approaching the end of Thursday’s New York session, the US dollar was on course to post its steepest single-day decline since November 1st. The US Dollar Index, which measures the dollar’s performance against 6 other major currencies, slipped at one stage by 0.7 index points to a 1-month low of 96.17, before recovering slightly to 96.27.

After lifting the funds rate to 2.25-2.5 percent, the Fed signalled on Wednesday that only 2 increases to the rate were likely in 2019, down from its September forecast of 3 increases.

“Over the past year the economy has been growing at a strong pace, the unemployment rate has been near record lows and inflation has been low and stable. All of those things remain true today,” Fed Chairman Jerome Powell said at Wednesday’s press conference.

Powell added, however, that “since the September meeting . . . some cross-currents have emerged.”

Essentially, the Fed believes that the US economy is in good health, but is acknowledging risks originating from elsewhere in the world, including Brexit and a Chinese economic slowdown, as well as trade uncertainties—the so-called “cross-currents.”

Thursday’s Fed-induced dollar weakness has taken the yen to its strongest levels in 3 months against the greenback, at or near ¥111, and has driven the euro to a 6-week high of $1.1475. The pound, meanwhile, firmed to $1.266.

It wasn’t all a bed of roses, though, as the Australian and New Zealand dollar currencies performed barely any better than their US counterpart. Now at respective rates of $0.712 and $0.678, the antipodes were weighed down by the market’s switch to risk-off trading.

Like the US dollar, the Canadian dollar had a shocker. It’s seemingly mission impossible for the loonie amid a never-ending decline in the price of Canada’s largest export, oil. Brent crude, the international benchmark for oil prices, fell a further 3 percent on Thursday to a 15-month low of $54.70 per barrel, taking total losses since October 3rd to $32, or 37 percent. The loonie weakened as a result to an 18-month low of C$1.353.

For the US dollar as a whole, experts offered differing post-Fed opinions.

After a solid 2018, the dollar “will remain strong, at least for the coming year,” Barclays’ Head of Asia FX, Hamish Pepper, told Bloomberg TV.

“We continue to feel that the US dollar is poised to weaken on the basis of cyclical, structural and secular trends,” wrote Scotiabank strategists Shaun Osborne and Eric Theoret.

Albeit prior to Wednesday’s Fed revisions, ING said it suspects the dollar “is now overvalued against a host of currencies, particularly those in emerging markets.” Analysts at the Dutch bank “doubt that the dollar in 2019 will repeat its gains of 2018.”

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