Euro, pound drop sharply, dollar jumps after Fed signals upcoming rate hikes

Federal Reserve officials signaled on Wednesday that they expected to raise interest rates from near-zero levels sooner than they had previously forecast.

The euro and the pound both fell sharply against the dollar after the announcement.

The dollar climbed to an almost two-month high of $1.1984 per euro on Thursday, extending its gain of about 1 per cent from the previous session. Sterling slipped to the lowest point since May 7 at $1.39745.

Cryptocurrencies were also hurt by the dollar’s strength, with bitcoin hovering at $38,624 following a 4.5 per cent slide Wednesday, and ether at $2,393 after a 7 per cent selloff.

The Fed held interest rates on Wednesday, but the statement that followed this announcement had a hawkish tone, analysts noted.  The statement that followed cited an improved health situation and did not include a long-standing reference that the crisis was weighing on the economy.

There was no indication that the Fed was concerned with rising inflation, which it described as “transitory.” The greater concern is the rapid growth spurt that the US economy is enjoying as the country emerges from the pandemic.

“indicators of economic activity and employment have strengthened,” the statement said.

The central bank now see rates rising to 0.6 per cent by the end of 2023, up from 0.1 per cent.

“The Fed’s super hawkish pivot should reinforce the lows and offer further near-term USD support,” TD Securities analysts wrote in a research note.

“A double-whammy of higher rates and wobbly risk sentiment would result in positioning squeeze and the start of a new narrative,” possibly resulting in “a 2 per cent broad USD rally through the summer months,” the note said

The Fed also indicated that it was planning steps toward reducing their vast bond purchases — tweaks that, together, demonstrated their increasing confidence that the economy would rebound robustly from the pandemic.

Growth is now forecast at 7 per cent for the year.