Dollar slides as Fed dampens early US rate hike view

NEW YORK: The US dollar fell on Wednesday, after the Federal Reserve said it does not expect to raise interest rates through all of 2023, contrary to market expectations.

The dollar index dropped 0.5% to 91.44 after the Fed comments.

The greenback had reversed its slide in recent sessions on a surge in US Treasury yields due in part to growing expectations that the Fed may tighten rates earlier than thought on forecasts of a faster-than-expected economic recovery.

In a statement after the Fed held interest rates steady, the US central bank said it expects a rapid jump in US economic growth and inflation this year as the COVID-19 crisis winds down, and vowed to keep its target interest rate near zero for years to come.

That was in contrast to what the eurodollar futures market suggested before the Fed statement, almost fully pricing in a rate hike by December 2022 and three increases in 2023.

While the improvement in the Fed's economic outlook did not immediately change policymakers' expectations for interest rates, the weight of opinion did shift. Seven of 18 officials now expect to raise rates in 2023, compared to five in December.

"The Fed has materially upgraded its assessment of the US economy's potential over the next several years, rather than merely reshuffling improvements from one year to another," said Matt Weller, global head of market research, at Gain Capital.

"Though policymakers did start to price in earlier interest rate hikes, the shift was less hawkish than many traders had feared," he added.

After the Fed statement, eurodollar futures pared back bets on an interest rate hike by December 2022. It has priced in so far a 90% chance of tightening by March 2023 and just two hikes for the whole of that year.

The euro rose 0.7% against the dollar to $1.1978.

Against the yen, the dollar fell 0.2% to 108.84 yen.