US Dollar Trades on Mixed Signal as Market Reels from Fed Rate Hike Announcement

The US dollar halted its descent in the Asian session on Thursday as the recently announced Federal Reserve interest rate hike rocked the financial markets.

Money markets anticipated the 75 basis points (bps) increase announced yesterday and had already priced in this possibility and several other rate hikes as inflation continues to swell. The greenback took an immediate downturn after Fed Chair Jerome Powell’s speech yesterday before finding a footing in the early Asian session.

The bearish reversal recorded today helped the single currency extend its gains against the euro as the EUR/USD pair etched closer to last month’s low at 1.0348. The dollar also received some support from US Treasury yields, which plummeted on Wednesday but regained an upward momentum today.

However, the dollar continued on its two-day slide against the Japanese yen as the policy differences between the US Fed and the Bank of Japan widened. Unlike the Federal Reserve, the BoJ remains resolute on maintaining an ultra-lose policy, pinning internet rates near zero. At press time, the USD/JPY trades at 132.80.

Against the Aussie, the greenback lost dominance after the AUD/USD fell to the 0.6850 low. However, the Australian dollar could not facilitate a bullish push above the 0.7025 mark, triggering a pullback in the early Asian session today.

US Dollar Index (DXY) Taps Twenty-Year High Near 106

Interestingly, the US dollar index (DXY) tapped a fresh multi-decade high yesterday at 105.79 but has dropped below the 104.60 level, at press time, following the ease off in the Asian session.

Analysts at Westpac explained: “The dollar index’s reversal along with rates after the Fed lifted rates 75 bp speaks to elevated short-term expectations more than anything else.” They added:

“It could ease back to the low-104s near term before the uptrend resumes. Chair Powell outlined a resolute path for taking Fed Funds to just shy of 4% by 2023, surely keeping risky assets unsettled for an extended period…the index can make a run at 107 in Q3.”