The dollar appreciated on Wednesday to a new two-decade high, after the US Federal Reserve raised its benchmark interest rate by another 75 basis points, as the market expected, and signaled more significant increases in the cost of credit for the remainder of the year.
the fed raised the rate by three quarters of a percentage pointto a range of 3.00%-3.25%, while new estimates indicate that borrowing costs will advance to 4.40% by the end of the year before eventually peaking at 4.60% in 2023.
The central bank’s quarterly projections see US GDP growth slowing to 0.2% this year, before recovering to 1.2% expansion in 2023, well below output potential.
No Fed rate cuts expected until 2024.
The dollar index reached a new 20-year high of 111.63 units, when compared to a basket of peer currencies, and added 1.1% to 111.42 units in the afternoon.
The euro, the largest component in the dollar index, fell to a 20-year low, hitting $0.9810. The European single currency was trading at $0.9837, down 1.3% on the day.
Against the yen, the dollar posted smaller gains against other currencies, adding 0.5% to 144.41 yen. Traders were wary of taking the dollar higher given the possibility of Bank of Japan intervention to support the yen.
“They (the Fed) have a short window to act aggressively and they seem eager to take advantage of it,” said Jan Szilagyi, co-founder and CEO of Toggle AI, an investment consultancy.
“There is another reason to expect more hikes: people’s and market’s tolerance for tighter monetary policy is much higher with the unemployment rate below 4%, a record low,” he said.
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