The dollar jumped to a six-year high against the yen on Wednesday while the euro tumbled from five-month peaks after forecasts from the Federal Reserve showed a faster pace of rate hikes over the next few years than had been projected in June. The Fed's statement after a two-day policy meeting remained cautious, however, sticking to its low-interest-rate pledge for a "considerable time" and expressing concern about slack in the labour market, but currency investors focused on the Fed's interest rate projections.
For the end of next year, the median of the projections was 1.375 percent, compared to 1.125 percent in June, while the end-2016 projection moved up to 2.875 percent from 2.50 percent. In addition, 14 of the 17 Fed members now expect an interest rate increase next year, up from 12 in June.
"The dollar is reacting to the interest rate forecasts, which were higher," said Vassili Serebriakov, currency strategist at BNP Paribas in New York. "The Fed statement, on the other hand, was pretty dovish, but the market has already priced that in following reports from yesterday." High interest rates burnish the allure of dollar-denominated assets. There were also two dissenters to the Fed decision to keep its near-zero rate pledge. Dallas Federal Reserve Bank President Richard Fisher and Philadelphia Fed chief Charles Plosser argued that the guidance on rates could tie the central bank's hands if it felt it had to move more quickly to tighten monetary policy.
In late trading, the dollar surged to 108.10 yen, the highest since mid-September 2008, and was last at 107.78, up 0.7 percent. The euro slid to $1.2905, down 0.4 percent, after hitting a five-month high of $1.2981. The FOMC meeting also provided forecasts for growth, inflation, and unemployment. Overall, Fed officials were marginally more pessimistic about growth over the next few years but more optimistic about unemployment continuing to fall.
With the Fed meeting out of the way, economic fundamentals should continue to underpin the dollar, analysts said. "The bottom line remains that it's a matter of time when the Fed hikes rates next year, not if it does, which continues to contrast the outlook for the euro zone and Japan where tighter policy isn't even on the radar," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. Earlier in the session, US data showed consumer prices fell last month, which initially weighed on the dollar.
The Labor Department said its Consumer Price Index fell 0.2 percent in August as a broad decline in energy prices offset increases in food and shelter costs, marking the first dip since April 2013 and below expectations for a flat reading, according to a Reuters poll of economists.
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