Dollar Steadies as Traders Assess Fed Outlook

The dollar index held around 100.2 on Friday, remaining close to seven-week highs as traders weighed the Federal Reserve’s policy outlook following its latest rate decision and amid softer oil prices. The index is heading for a weekly gain of more than 1% after the FOMC unanimously lifted the fed funds rate by 25 basis points to 3.75%-4%, marking its first increase in three years. Fed officials also indicated that additional tightening could come later this year as they seek to contain rising price pressures, with Chair Kevin Warsh noting that inflation remains elevated. The Bank of Japan is also expected to raise rates, while the Bank of England left borrowing costs unchanged on Thursday but cautioned that prolonged conflict in the Middle East could eventually require a rate hike. Meanwhile, oil prices extended their decline for a third session as Saudi Arabia worked to restore flows through its East-West pipeline, easing inflation worries.

The dollar index held above 100 on Thursday following a sharp gain in the previous session, hovering near seven-week highs after the Federal Reserve raised interest rates for the first time in three years and signaled further tightening this year to contain inflation. The FOMC increased the fed funds rate by 25 basis points to 3.75%-4%, as expected, in a unanimous decision. Fed Chair Kevin Warsh also said inflation remains too high, while data released last week showed core US inflation rose more than anticipated in August. Meanwhile, President Donald called for rates to be quickly lowered to 1% or below in a social media post, though he stopped short of criticizing Warsh. Elsewhere, the Bank of England is expected to keep rates unchanged today, while the Bank of Japan is scheduled to raise rates on Friday. On the geopolitical front, oil prices eased amid hopes that Saudi Arabia can restore energy flows through its East-West pipeline.

The dollar index rose past the 100 for the first time in nearly seven weeks on Wednesday after the Federal Reserve raised interest rates by 25bps. The decision was unanimous among the FOMC and expected by markets after recent data pointed to elevated gauges of underlying inflation, low unemployment, and a sharp rebound in retail sales that underscores the strong position of consumers despite higher price growth. Projections by the policy-setting committee pointed to a loose consensus that at least one other hike is warranted this year, while unemployment was revised lower and economic growth was revised higher. The decision supported the dollar after earlier remarks by Chairman Warsh raised skepticism over the Fed's willingness to fight inflation through higher policy rates instead of other tools, rekindling a dash to precious metals and other safe currencies. In the meantime, the Bank of England is expected to hold rates unchanged tomorrow, while the Bank of Japan is due to hike.