Dollar Drops as Fed Cuts Rates by Half a Percentage Point

Woman holds US dollar banknotes in this illustration taken May 30, 2022. (REUTERS/Dado Ruvic)

NEW YORK (Reuters) - The dollar dropped after the Federal Reserve on Wednesday cut interest rates by half a percentage point, citing greater confidence that inflation will continue to recede to the U.S. central bank's 2% annual target.

The Fed cut the overnight rate to the 4.75%-5.00% range and policymakers see the Fed's benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75%-3.00% range.

The dollar index was last down 0.53% on the day at 100.37, the lowest since July 2023. The euro gained 0.55% to $1.117575. The greenback weakened 1.07% to 140.825 Japanese yen.

"It's a more dovish cut. It certainly wasn't a hawkish cut," said Vassili Serebriakov, FX & macro strategist at UBS in New York.

"The way we thought about it before the announcement is that you know a 50-basis point cut is dollar negative. If they had cut by 25 bps, there were different scenarios where the dollar could perform. But a 50-basis point cut is unambiguously dollar negative."

Following the Fed's rate move, futures on the fed funds rate, which measures the cost of unsecured overnight loans between banks, have priced in about 72 basis points of more rate cuts this year.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, hit its steepest level since July 2022 following the Fed's cut. It was last at 7 basis points.

Sterling, the best performing G10 currency of the year, rose 0.84% at $1.32730. The yuan strengthened against the dollar at 7.0761 per dollar in offshore trading.

"The market was pretty much 50-50 going into the decision. So it surprises obviously half the market," said Brad Bechtel, global head of FX at Jefferies in New York. "And clearly the Fed is trying to get out in front of the slowdown in the US economy and provide support. But so far, the reaction in the market isn't overly crazy."

Currency bid prices at 18              

September​ 07:00 p.m. GMT

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 100.62 100.91 -0.28% -0.74% 100.96 100.21

Euro/Dollar 1.1145 1.1115 0.27% 0.96% $1.1189 $1.1108

Dollar/Yen 141.19 142.42 -0.82% 0.15% 142.28 140.53

Euro/Yen 1.1145​ 158.24 -0.54% 1.13% 158.26 157.06

Dollar/Swiss 0.8433 0.8472 -0.47% 0.2% 0.8467 0.8392

Sterling/Dollar 1.3242 1.3163 0.64% 4.09% $1.3298 $1.3157​

Dollar/Canadian 1.3575 1.3599 -0.17% 2.41% 1.3608 1.3541

Aussie/Dollar 0.6781 0.6756 0.43% -0.49% $0.682 $0.675

Euro/Swiss 0.94 0.9414 -0.15% 1.23% 0.9416 0.9382

Euro/Sterling 0.8415 0.8444 -0.34% -2.92% 0.8453 0.8405

NZ Dollar/Dollar 0.6229 0.6187 0.69% -1.35% $0.6268 0.6184

Dollar/Norway 10.5649​ 10.5945 -0.28% 4.24% 10.6202 10.478

Euro/Norway 11.7742 11.7919 -0.15% 4.9% 11.8138 11.7172

Dollar/Sweden 10.1726 10.189 -0.16% 1.05% 10.2196 10.106

Euro/Sweden 11.34 11.3237 0.14% 1.93% 11.3534 11.3012

 

(This story has been corrected to say that the yuan strengthened against the dollar, instead of yuan down, in paragraph 8)

 

(Reporting by Karen Brettell and Chibuike Oguh in New York; Editing by Lisa Shumaker and Diane Craft)