US Dollar Back on Its Feet After Broad Selloff

USD currency

The dollar’s bullish uptrend resumed on Thursday, as the markets continued to absorb the Federal Reserve’s latest rate statement opening the door to a midyear rate hike.

The US dollar index, a trade-weighted average of the dollar against a basket of six competitor currencies, advanced 0.46 percent to 99.00. The index plunged nearly 2 percent late Wednesday afternoon after the Federal Open Market Committee released its official rate statement.

The FOMC dropped the word “patient” from its official press release on Wednesday, a sign policymakers were opening the door to a midyear rate hike. However, policymakers also lowered their economic growth and inflation projections and signaled any future rise in interest rates would be very gradual. Fed officials cut their median estimate of the key lending rate to 0.625 percent for the end of 2015 from the 1.125 percent projected in December.

While a June rate hike appears to be on the table, analysts expect the Fed to keep interest rates at record lows until at least September. That would leave just enough room for one or two rate adjustments before the end of the year. The Fed acknowledged that a rate increase would be “unlikely” at the April policy meetings.

“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium-term,” the Fed noted in its official rate statement.

The Fed’s Board members also downgraded their projections of economic growth over the next three years. The economy is forecast to grow between 2.3 percent and 2.7 percent this year, down from 2.6 percent to 3 percent in the December estimate. GDP growth is expected to average the same next year, rather than the 2.5 percent to 3 percent the Fed forecast in December.

The dollar plunged immediately following the mixed message, experiencing its biggest single-day decline against the euro since 2009. The greenback fell sharply against every currency in its trade-weighted index, registering 200 point drops against the British pound, Swiss franc and Canadian dollar.

The EUR/USD was back at familiar levels on Wednesday, declining more than 150 pips to 1.0676.

The GBP/USD retraced much of its Wednesday gains, falling 95 pips to 1.4862.

The dollar bounced back against the franc, as the USD/CHF rose around 100 pips to 0.9924.

The USD/CAD jumped more than 140 pips to 1.2721.