Dollar falls as hawkish Fed delivers without an extra kick

March 17, 2022: The dollar fell on Wednesday after the U.S. Federal Reserve moved to a hawkish monetary policy but without delivering a tougher surprise that might have added to its weeks-long momentum.

The dollar index, which had gained 3% since the start of the Russia-Ukraine war on Feb. 24 and 10% since May, fell as much as 0.6% on Wednesday as traders parsed Fed statements following a two-day meeting.

"There were no additional hawkish surprises," said Erik Bregar of Silver Gold Bull Inc, adding that traders seemed to have been expecting too much more from the Fed. "That explains why some of these hawkish bets are being pared back a bit," he said.

The dollar lost value to the euro and the British pound, both of which had been up earlier in the day on hope for a compromise in Russia and Ukraine peace talks.

The euro and pound both gained 0.7%, with the euro trading at $1.1032.

The Fed raised interest rates by the expected quarter of a percentage point and projected its policy rate would reach a range of 1.75% to 2% by the end of this year and 2.8% next year.

Strategists at Wells Fargo Securities called the Fed comments "very hawkish," in a note to clients and said it should be good for the dollar going forward.

The decline in the dollar index was surprising and could reflect disappointment that the Fed rhetoric was not more hawkish, they said.

The Fed did project the equivalent of quarter-percentage-point rate increases at each of its six remaining policy meetings this year but that was in line with market expectations for rates.

Yields on 10-year U.S. Treasuries reached 2.2% and two-year yields rose to 1%, flattening the yield curve.

The Bank of England meets on Thursday and markets expect it to raise rates by another quarter-point.

The Bank of Japan is expected on Friday to leave ultra-loose policy settings in place.

The dollar rose 0.4% on the Japanese yen and during the day touched 119.13 yen, the highest in more than five years.

The commodity-sensitive Australian dollar added 1.3% to $0.7288.

Bitcoin was last up 5% on the day to $41,186.

Reuters