Dollar gains as Fed flags more rate hikes ahead

WASHINGTON DC: The Chinese offshore yuan was last 0.3% lower at 6.9643 per dollar. Markets now turn their attention to rate decisions by the Bank of England and the European Central Bank (ECB) due on Thursday, with both central banks also expected to deliver a 50 basis point rate hike.

The dollar climbed broadly on Thursday after the Federal Reserve raised interest rates by a widely-expected half a percentage point overnight, and its policymakers foresaw making further hikes and keeping rates high for longer than earlier hoped.

Setting out the Federal Open Market Committee's determination to tame inflation despite a risk of recession, Fed Chair Jerome Powell said rates were expected to peak above 5%. The euro fell 0.29% to $1.0651, while sterling lost 0.34% to $1.2386.

The kiwi slumped 0.3% to $0.6440, and against the Japanese yen, the dollar rose 0.17% to 135.705. "A virtually unchanged FOMC statement raised hawkish flags due to the conspicuous absence of a dial back in tightening language," said Vishnu Varathan, head of economics and strategy at Mizuho Bank.

"The upshot is that the Fed is not merely indicating a higher peak, but is emphasizing on restrictive rates for longer." Against a basket of currencies, the U.S. dollar index rose 0.22% to 103.89.

But was still languishing near a six-month low hit in the previous session, which had reflected some market scepticism over whether the Fed's would actually take rates so high.

Fed funds futures show that markets are expecting U.S. rates to peak just under 5% by May next year, lower than what the Fed has guided.

"The Fed does not want financial conditions to ease, but increasingly investors are saying: we hear what you are saying and we know what you want, but we don't believe you," said Christian Hoffmann, portfolio manager and managing director at Santa Fe, New Mexico-based Thornburg Investment Management.

A growing belief that U.S. inflation has likely peaked also fuelled market scepticism. U.S. consumer prices rose less than expected for a second straight month in November, data released this week showed, with underlying consumer prices advancing by the least in 15 months.

In Asia, data released on Thursday showed that China's economy lost more steam in November as factory output slowed and retail sales extended declines, both missing forecasts and clocking their worst readings in six months, with the economy hobbled by surging COVID-19 cases and widespread virus curbs, which were only relaxed last week.

The Aussie, often used as a liquid proxy for the yuan, fell 0.55% to $0.6826. The Chinese offshore yuan was last 0.3% lower at 6.9643 per dollar.

Markets now turn their attention to rate decisions by the Bank of England and the European Central Bank (ECB) due on Thursday, with both central banks also expected to deliver a 50 basis point rate hike.

"The Bank of England and the ECB face many challenges. I think their economies are really going to struggle next year," said Jarrod Kerr, chief economist at Kiwibank. "They need to be more cautious around their outlook and the simply softer economies."