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| US Dollar pressured as Federal Reserve's Dovish Rate Hike Disappoints Markets |
On March 22, 2023, the US Federal Reserve increased the federal funds rate by 25 basis points to a range of 4.75%-5%, in line with market expectations. However, the decision was perceived as dovish by traders, leading to a bearish market for the US dollar. US yields sank during the press conference, prompting traders to price out the Fed's hawkish stance. Additionally, the Federal Open Market Committee's statement and forward guidance from Federal Reserve Chairman Jerome Powell were seen as less hawkish, leading traders to move away from the greenback.
Prior to the Fed's announcement, the market had priced in a year-end target rate of 4.36%, which dropped to 4.26% in volatile reactions to the statement. US 2-year Treasury yields also fell to 4.77%, dropping from 4.259% on the day and reaching a low of 3.958%. Consequently, the US Dollar Index (DXY) fell to a low of 102.065 from a high of 103.265.
The Federal Reserve's median forecast shows rates at 5.1% end-2023 and 4.3% end-2024. However, the committee deleted the reference to ongoing increases, and Chairman Powell suggested that some additional policy firming may be appropriate. The Federal Reserve also noted that while US banks are sound and resilient, events are likely to weigh on growth, and tighter credit conditions may weigh on economic activity, hiring, and inflation.
In summary, the US Federal Reserve's dovish rate hike decision has led to a bearish market for the US dollar, with traders pricing out the Fed's hawkish stance. The decision was based on the belief that some additional policy firming may be appropriate, and while US banks remain sound and resilient, events are likely to have a negative impact on growth.
