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The dollar held at more than one-week lows on Thursday after the US central bank kept its economic forecasts unchanged with investors expecting more losses if the European Central Bank outlines a more optimistic outlook on the economy.
Though the Fed delivered a quarter percentage point rate hike as widely expected, some analysts expected policymakers to sound a more upbeat note on the economy thanks to a landmark US tax Bill that may become reality over the next few weeks.
3 more rate hikes
The Fed projected three more hikes in both 2018 and 2019, unchanged from the last round of forecasts in September and said the tax overhaul would boost the economy next year but leave no lasting impact, with the long-run potential growth rate likely stalled at 1.8 per cent.
The dollar plunged 0.6 per cent against a trade-weighted basket of currencies after the decision on Wednesday, erasing a large chunk of its near 2 per cent rise in the last three weeks. On Thursday, it was broadly flat and nursing losses at 93.46.
ECB policy meet
Against the euro, the dollar was slightly weaker on the day at $1.1824 with traders focused on a ECB policy meeting later today where it may bump up some of its economic forecasts. Against the yen, the dollar inched up 0.2 per cent to 112.75 yen, after sliding 0.9 per cent on Wednesday and having retreated from Tuesday's four-week high of 113.75 yen.
Though any change in policy language is unlikely, investors would take any positive outlook on the economy as a green light to buy the euro as that would indicate authorities are not as worried about currency strength as they were earlier in the year.
“A hawkish hold message from the ECB on Thursday would likely add to downside pressure on the dollar in the short-term,” BNP Paribas strategists said in a note.
The euro has been the standout performer among the major G10 currencies this year, gaining than 12.5 per cent against the dollar so far this year as growth expectations have overtaken other drivers for the currency such as interest rate differentials and capital flows.
Defeat on Brexit blueprint
Sterling held gains after jumping in New York trading hours on Wednesday after the British government suffered a parliamentary defeat over its Brexit blueprint on Wednesday.
The pound edged 0.2 percent higher to $1.3441 on Thursday before a policy meeting later in the day where the Bank of England is widely expected to keep interest rates on hold at 0.5 percent on Thursday, after raising rates for the first time since 2007 last month.
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