Dollar rises as Fed gives hope of rate cuts starting June

The US dollar rallied against all G-10 currencies except the yen, on the back of rate hikes by several central banks while a relatively strong US economy and hoped of Fed lowering interest rates this year itself boosted carry trade. 

The Federal Open Market Committee of the US Federal Reserve at its meeting on Wednesday, decided to keep the target range for the federal funds rate at 5.25 to 5.50 per cent range, in order to balance the risks in achieving its employment and inflation targets.

The Committee said it is not yet ready to lower interest rate while keeping the rate unchanged at the 5.25-5.50 range for the fifth consecutive time.

The Fed has been following an aggressive rate policy over the last two years in its fight against rising inflation rate.

Governor Jerome Powell said that January and February and decided to keep rates unchanged in view of the “bumpy” path to disinflation.

However, he expects the process of disinflation will start “fairly soon,” ensuring a smooth transition for markets.

In fact, the Fed upgraded its outlook for growth in 2024 with fresh data suggesting the US economy is on solid ground with the number of Americans filing for unemployment benefits falling and home sales picking up in February.

Fed, he said, will start lowering interest rates in June, which will be followed by two more cuts, provided inflation gets tamed.

The Fed move bolstered the dollar, which continued to gain against all major global currencies, including the British Pound, the Euro and the Chinese Yuan. 

Stocks and government bonds also rallied as traders grew increasingly confident that the Fed will ultimately bring rates down. 

Dollar’s rally that continued for a second week, was also supported by rate hikes by other central banks.

The FOMC sets its policy rate with the aim of achieving maximum employment and a long term inflation rate of over 2 per cent.