By Richard Leong
NEW YORK (Reuters) – The dollar rose broadly on Wednesday, hitting a two-month high versus the yen, as the Federal Reserve signaled it may raise interest rates for a third time this year even as inflation has remained below its 2 percent goal.
The U.S. central bank also said after a two-day meeting it will begin reduction of the Fed’s $4.5 trillion balance sheet in October by allowing small amounts of Treasuries and mortgage-backed securities to run off. [nFOMKKEDCA]
“Right now, the market sees the Fed more hawkish than anticipated,” said Tim Alt, director of currencies and rates at Aviva (LON:AV) Investors.
Some traders had thought catastrophic damage from Hurricanes Harvey and Irma in Texas and Florida might force the Fed to postpone a rate increase until next year.
The Fed raised rates by a quarter point in March and June and its current target range is now at 1.00-1.25 percent.
“The Fed didn’t alter this time to the market’s outlook. This time the market adjusted to the Fed’s outlook,” said Brent Schutte, chief investment strategist with Northwestern Mutual Wealth Management Co.
The futures market implied traders saw a 73 percent chance of the Fed raising rates at its Dec. 12-13 meeting , up from 52 percent before the Fed’s latest policy statement and forecast, CME Group’s FedWatch tool showed.
The dollar index, which tracks the greenback against six major currencies, was modestly lower before turning higher on the Fed’s forecast for one more rate hike in 2017. It was up 0.7 percent for its biggest one-day increase since Aug. 4 at 92.426.
The euro <eur=>slid 0.8 percent to $1.1894, its lowest in four sessions, while the greenback gained 0.5 percent to 112.17 yen <jpy=>after touching a two-month high at 112.51 yen, Reuters data showed.</jpy=></eur=>
Among emerging market currencies, the Mexican peso <mxn=d2>recovered from Tuesday’s losses spurred by the second deadly earthquake to strike the country in two weeks.</mxn=d2>
The Mexican currency ended up 0.2 percent at 17.76 peso per dollar <mxn=d2>, reversing the prior day’s 0.2 percent decline.</mxn=d2>
The New Zealand dollar <nzd=d4>gained 0.6 percent to $0.7360 after reaching its highest level in 6-1/2 weeks as one poll showed the country’s National Party pulled ahead of the rival Labour Party ahead of a general election this weekend.</nzd=d4>
Support for the National Party jumped 6 points to 46 percent, according to the One News-Colmar Brunton opinion poll, while support for the opposition Labour party slumped by seven points to 37 percent.