NEW YORK (Reuters) – The U.S. dollar saw modest gains in volatile trading on Wednesday, following the Federal Reserve’s decision to lower interest rates by half a percentage point. The central bank’s move reflected growing confidence that inflation is on track to return to its 2% annual target.
The Federal Reserve reduced its benchmark interest rate to a range of 4.75%-5.00%, with projections indicating further cuts throughout the next few years. Policymakers expect rates to drop by another 50 basis points by the end of 2024, with additional reductions slated for 2025 and 2026, bringing the rate to between 2.75% and 3.00%.
While the dollar initially declined after the Fed’s announcement, it regained ground after Fed Chair Jerome Powell concluded his press conference. The dollar index, a measure of the currency against a basket of peers, rose 0.05% to 100.970. Earlier in the session, it had dropped to 100.21, its lowest level since July 2023. The euro slipped 0.01% to $1.111275, and the dollar remained steady against the Japanese yen at 142.370.
Vassili Serebriakov, a foreign exchange strategist at UBS in New York, described the move as a “dovish cut,” emphasizing that the 50-basis point reduction was largely seen as negative for the dollar. “A smaller, 25-basis point cut would have offered scenarios where the dollar could perform better, but a 50-basis point cut clearly weakens the dollar,” he said.
During his remarks, Powell expressed optimism about the economic outlook, dismissing concerns about a potential recession. “Right now, we don’t see anything that suggests a recession is likely,” he said. “We have solid economic growth, decreasing inflation, and a robust labor market.”
Following the Fed’s rate cut, futures contracts tied to the federal funds rate have factored in roughly 70 basis points of additional rate reductions by year-end.
Additionally, a key segment of the U.S. Treasury yield curve, which tracks the spread between two- and 10-year Treasury yields, saw its steepest curve since July 2022 after the rate decision, closing at 7.8 basis points.
Elsewhere, the British pound, the best-performing G10 currency this year, gained 0.28%, trading at $1.3200. The Chinese yuan also strengthened in offshore markets, reaching 7.0780 per dollar, its highest level since June 2023.
Brad Bechtel, global head of FX at Jefferies in New York, commented on the market’s reaction, noting that it had been split ahead of the decision. “Half the market was surprised by the move, but it’s clear the Fed is acting preemptively to support the U.S. economy,” he said. “So far, the market response has been relatively calm.”
Currency Market Overview (As of 08:15 p.m. GMT, September 18)
- Dollar index: 100.970 (+0.05%)
- Euro/Dollar: $1.111275 (-0.01%)
- Dollar/Yen: 142.370 (flat)
- Sterling/Dollar: $1.3200 (+0.28%)
- Offshore Yuan/Dollar: 7.0780
Other currencies, such as the Canadian dollar and the Australian dollar, also saw modest movement, reflecting a global adjustment to the Fed’s rate cut.
