Dollar slips after Fed seen tilting dovish following statement By Reuters

© Reuters. FILE PHOTO: Woman holds U.S. dollar banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Herbert Lash and Saqib Iqbal Ahmed

NEW YORK (Reuters) – The dollar slid broadly against major currencies on Wednesday after the Federal Reserve signaled that future interest rate increases to battle high inflation could be made in smaller increments.

The Fed, as expected, raised its key lending rate by 75 basis points for the fourth straight time at the end of its two-day policy meeting on Wednesday.

GRAPHIC: Fed delivers another big hike https://graphics.reuters.com/USA-FED/dwpkdgydxvm/chart.png

The U.S. central bank acknowledged in a statement the debate around its policy tightening, its impact on the U.S. and world economies, and the danger that more large rate hikes could stress the financial system or trigger a recession.

“The market has interpreted this as a dovish statement,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

“Instead of hiking 75, this reaffirms the market’s idea the Fed will slow down the hikes to 50 basis points” when it meets in December, he said.

The euro was 0.54% higher against the dollar at $0.9927, while against the Japanese yen, the dollar fell 1.2% to 146.405 yen.

The Fed’s battle against inflation running at four-decade highs has unleashed the most aggressive hiking campaign in more than a decade.

“What a world we live in when a 50-basis-point hike is somehow dovish,” Chandler said.

Future markets kept bets high that the Fed might still hike rates by more than 50 basis points in December as key reports on the labor market and the consumer price index could change the outlook.

Fed funds futures priced in a 98.4% probability that the Fed will raise rates by 75 basis points when it meets Dec. 13-14, a hike that would lift its policy rate to a range of 4.50%-4.75%.

Growing expectations that the Fed would dial down the aggressiveness of its rate hikes have weighed on the dollar in recent weeks.

GRAPHIC: Dollar rally https://fingfx.thomsonreuters.com/gfx/mkt/dwvkdgqaepm/Pasted%20image%201667323078707.png

Sterling was little changed on the day at $1.1525, ahead of a policy decision on Thursday by the Bank of England, which is also expected to announce a 75-basis-point rate increase.

The yen has slipped about 22% against the dollar this year, leading traders to be on alert for a possible intervention.

Japanese authorities are widely considered to have intervened in FX markets several times since September to pull the yen back from 32-year lows.

Japan’s currency interventions have been stealth operations in order to maximize the effects of its forays into the market, Finance Minister Shunichi Suzuki said on Tuesday, after the government spent a record $43 billion supporting the yen last month.