Dollar extends gains to six-month high on Fed prospects

US Dollar rose in European trade on Thursday against a basket of major rivals for the third straight session, scaling a six-month high as US treasury yields spike to multi-year highs following Fed's meeting.

The Federal Reserve paused interest rates but hinted strongly at another 0.25% rate hike before the year end, while cutting down prospects of a rate cut in 2024. 

The Index

The dollar index rose 0.25% to 105.70, the highest since March, with a session-low at 105.42, after closing up 0.2% yesterday following Fed's meeting.

US Yields 

US 10-year treasury yields spiked over 1.3% today on track for the third meeting in a row, hitting 16-year highs at 4.472% and bolstering investments in dollar. 

The Fed

As expected the Federal Reserve maintained interest rates unchanged at below 5.5%, already the highest since 2001.

It's a signal for the approaching end of the current policy tightening cycle. 

The Fed stated the pause intends to give a longer chance for recent policy decisions to manifest their impact on US data, even as inflation remains stubbornly away from 2%. 

The Fed said it'll continue to monitor data closely, especially labor and consumer prices data and global financial developments to determine the best path ahead for policies. 

Economic Outlook

The Federal Reserve's economic outlook report released yesterday included important modifications: 

Growth is now revised to 2.1% this year from 1.0% in June forecasts, while 2024 growth forecasts are revised to 1.5%, and 2025 forecasts are revised to 1.8%. 

Total inflation forecasts are revised to 3.3% this year, and 2.5% next year, and 2.2% in 2025. 

Core inflation forecasts are revise to 3.7% this year, and 2.6% next year, and 2.3% in 2025. 

The Fed maintained forecasts for target interest rates at  5.75%, hinting strongly at another interest  rate hike this year. 

Powell

Fed Chair Jerome Powell said Wednesday the process of controlling inflation is a long-term one, and interest rates are likely to remain high for an extended duration to bring inflation down. 

He added that another interest  rate hike won't impact the economy much but will help bring inflation towards the 2% medium target.

Jerome Powell expects inflation to reach the 2% target by the end of 2025, while remaining above 3% this year , adding the Fed is focused mainly on core inflation more than main inflation, which is influenced by volatile energy prices.