Dollar Remains Firm as Fed Calls for Further Hikes

The US dollar on Thursday was firm in Asia following the withdrawal of the US Federal Reserve from a more aggressive policy tightening move. This followed when it gave markets the distinct impression of being much less cautious in comparison with what they had expected.

The Fed raised its interest rates by 25 basis points. Moreover, this was the central bank’s fourth rate hike this year. Meanwhile, there are predictions that the Fed will have a fewer rate hike next year compared to one it had during its September policy meeting.

The commitment of the Fed in maintaining its monetary tightening policy plan surprised markets. This is despite the escalating uncertainty regarding the growth in the global economy that brought a decline in the US stocks and depressing Asian equities.

“Investors had braced for the worst – from no rate hike to dissents and a change in the risk assessment. And while there were subtle tweaks in the statement and lowered growth and inflation forecast, these changes were not as significant as the market had hoped,” said BK Asset Management Currency Strategy Managing Director Kathy Lien.

Instead of three, the “dot plots” of the Fed is currently at signal two rate hikes for 2019. However, the market was uncertain about this and is barely pricing one hike in a reflection of a global growth slowdown.

As of 0402 GMT, the US dollar index remained firm at 96.99. The greenback bounced back from its overnight low of 96.55 and the 96.97 at the New York close amid the acceptance of markets with the outlook of the Fed.

Fed Chairman Jerome Powell suggested during a press conference that the two expected rate hikes next year were set in tone.

“There would be circumstances in which it would be appropriate for us to go past neutral, and there would be circumstances in which it would be wholly inappropriate to do so,” Powell said.

As per OCBC Bank Treasury Research Head Selena Ling, the economic data will define the potential activity of the Fed next year.

“We shade our forecast to two rather than three FOMC hikes next year, but emphasize that we’re essentially back to data dependency i.e. if wage inflation accelerates further amid still resilient growth, there is little to stop the FOMC from doing a third hike if the data warrants it,” Ling wrote.