(Bloomberg) – The dollar declined to a one-week low after the Federal Reserve lowered its 2016 and 2017 projections for U.S. interest rates.
The U.S. currency slid even as the central bank policy makers raised their assessment of the economy and stayed on track to raise interest rates this year for the first time in almost a decade. The Fed’s median estimate for the end of 2016 fell to 1.625 percent, compared with 1.875 percent forecast in March for the so-called dots.
“There’s a dovish reaction to it right now,” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone. “They want to be reasonably confident on inflation. It’s not like inflation ticked up and we’re going to pull the trigger.”
The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers fell, 0.2 percent to 1,172.74 as of 2:27 p.m. in New York, reaching the strongest level since June 10.
The U.S. currency declined 0.3 percent to $1.1283 per euro. It gained 0.4 percent to 123.87 yen, after rising as much as 1.1 percent.
Officials kept the benchmark overnight fed funds rate in a zero to 0.25 percent range, where it has been since December 2008 to bolster the economy after the worst recession since the Great Depression.
Fed Policy
“Economic activity has been expanding moderately,” the Federal Open Market Committee said in a statement. “The pace of job gains picked up,” it said, and “underutilization of labor resources diminished somewhat” since their last meeting in April.
Fed officials maintained their forecast, known as dots, for the benchmark interest rate at the end of 2015, while lowering it for next year and the year after.
“The really interesting development was how many dots moved lower relative to the March meeting, that signals a little bit more tension on whether there’s a potential second rate hike or not,” Paul Eitelman, investment strategist at Russell Investments Group in Seattle, said by phone. “That’s what the market is reacting on right now.”
Fed fund futures give a 46.5 percent probability that the central bank will lift rates in September, compared with 49.8 percent earlier on Wednesday afternoon, according to data compiled by Bloomberg. The probability of an increase in December is 77 percent.
“The Fed’s going to take gradual steps to normalizing monetary policy,” Matthew Whitbread, a Boston-based investment manager at Baring Asset Management, said by phone before the meeting. “We’re structurally bullish on the dollar, we have been for a while.”
