US Dollar Higher on Fed Outlook

GBPUSDJune14

Top officials of the US central bank raised the benchmark interest rate slightly on Wednesday, as the recovering economy no longer seems to need quite as much of the boost it gets from ultra-low rates.

Contrary to what many expected, Treasury bond exchange traded funds were among the best performers after the Federal Reserve raised benchmark interest rates for the third time in six months.

The Fed has not reached its 2% core inflation target over the past four years, with monthly consumer inflation released on Wednesday again weaker than expected. According to the Commerce Department, retail sales fell 0.3 percent in May, which was the first decline since February and biggest drop in 16 months since January 2016.

The Dow Jones Industrial Average fell 14.66 points, or 0.07 percent, to 21,359.9, the S&P 500 lost 5.46 points, or 0.22 percent, to 2,432.46 and the Nasdaq Composite dropped 29.39 points, or 0.47 percent, to 6,165.50.

Inflation was expected to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecast.A retreat in inflation over the past two months has caused jitters among some Fed officials who fear that the shortfall, if sustained, could alter the pace of future rate hikes.

Now the Fed said the inflation will be below its 2 percent target. The Fed expects that inflation will not hit the current target, of two percent, and it has revealed plans for unwinding the post-asset purchasing balance sheet, which now totals nearly $4.5 trillion.

The US Federal Reserve lowered its forecast for inflation but raised its prediction for growth, opening the door for further rates hikes in 2017. Softening commodity prices did little bolster arguments that inflation will pick up the pace, even as the USA labor market remains on strong footing - raising the specter that central bank officials made a policy error.

"I think our dollar is getting too strong, and partially that's my fault because people have confidence in me", Trump told The Wall Street Journal.

A reduction in the Fed's holdings of Treasury and mortgage-backed securities will probably put some upward pressure on long-term interest rates by adding to the supply of those securities in the market, economists said. The market is expecting one more rate hike by the Fed in the current fiscal year. The dollar would get strengthened by the Fed's move.

The dollar nursed losses on Thursday, after weak United States inflation data left investors wondering if the Federal Reserve would be able to follow up its latest rate hike with another later this year.

The dollar index was last down 0.06 per cent, while the euro remained unchanged at $1.1214.

However, this implied "dot plot" liftoff path is not priced in to markets, which expect a fed funds rate of only 1.5% by year-end 2018.

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