Dollar Posts 20-Year High on Hawkish Fed

The dollar index (DXY00) on Wednesday rose +0.53%.  The dollar Wednesday rallied to a 20-year high after the Fed raised interest rates by +75 bp and signaled it would continue its aggressive rate hike policy. The dollar fell back from its best levels Wednesday after the 10-year T-note yield retreated from an 11-year high of 3.624% and fell -3.9 bp to 3.524%, which weakened the dollar’s interest rate differentials. 

Wednesday’s U.S. housing news was bullish for the dollar after Aug existing home sales fell -0.4% to 4.80 million, stronger than expectations for a decline to 4.70 million.

The FOMC, as expected, unanimously raised the fed funds target range by +75 bp to 3.00%-3.25%. The post-meeting statement said the FOMC "is highly attentive to inflation risks and "anticipates that ongoing increases in the fed funds target range will be appropriate" as the committee "is strongly committed to returning inflation to its 2% objective."

The Fed's dot-plot signals a steeper interest rate hike path than officials laid out in June.  The FOMC forecasts the fed funds rate at 4.4% by year-end, higher than a 3.4% forecast in June, and then rising to 4.6% in 2023, higher than a June estimate of 3.8%.

The FOMC lowered its U.S. 2022 GDP forecast to 0.2% from 1.7% in June and cut its 2023 GDP estimate to 1.2% from 1.7% in June.  The FOMC also raised its U.S 2022 core PCE forecast to 4.5% from 4.3% in June and raised its 2023 core PCE forecast to 3.1% from 2.7% in June.

Fed Chair Powell said the FOMC sees risks to inflation weighted to the upside, and the committee seeks to return to "sufficiently restrictive" interest rates.

EUR/USD (^EURUSD) on Wednesday fell by -0.95% and posted a new 20-year low.  A stronger dollar Wednesday weighed on the euro along with Russia’s escalation of the war in Ukraine after Russian President Putin ordered a “partial mobilization” of 300,000 Russian reservists.  Putin also pledged to annex the territories his forces have already occupied in Ukraine and vowed to use all means necessary to defend Russia. EUR/USD also took a hit Wednesday after Deutsche Bank said the Eurozone would face a deeper recession than previously forecast.   

ECB Vice President Guindos said despite data pointing to a "substantial" slowdown in growth across the Eurozone, risks to prices remain skewed to the upside.

Deutsche Bank said the Eurozone will face a deeper recession than previously forecast after Russia halted nat-gas deliveries through the Nord Stream 1 pipeline.  As a result, Eurozone 2023 GDP will contract -2.2% annualized, compared with a July projection of -0.3%.

USD/JPY (^USDJPY) on Wednesday rose by +0.03%.  The yen posted modest losses Wednesday after the BOJ unexpectedly boosted QE.  In an attempt to keep the 10-year JGB bond yield from moving above its 0.25% upper target, the BOJ on Wednesday announced unscheduled bond purchases and said it plans to buy 150 billion yen of 5-10 year bonds and 100 billion yen of 10-25 year bonds. The yen recovered nearly all of its losses after T-note yields gave up an early advance and turned lower.

• Stocks Push Higher Ahead of FOMC Meeting Results
• Dollar Strengthens as T-Note Yields Soar
• Stocks Tumble on Soaring Global Bond Yields
• Dollar Slightly Lower as Stocks Recover