US dollar falls, but off four-week lows, as Fed signals more rate hikes

The U.S. dollar slid on Wednesday after the Federal Reserve held interest rates steady, as expected, but signaled that borrowing costs will increase by another 50 basis points (bps) by end-December.

The dollar index was last down 0.3% at 103.01 after hitting a four-week low of 102.66 in the session.

The euro pared gains and last traded at $1.0827 , up 0.3%. Against the Japanese yen, the dollar fell 0.2% to 139.905 .

The rate-setting Federal Open Market Committee (FOMC) in a unanimous policy statement issued at the end of its latest two-day meeting, said "holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy."

While signaling more rate increases, Fed Chair Jerome Powell said in a press briefing that the U.S. central bank was not so far away from its target on the benchmark fed funds rate.

US central bank forecasts showed most policymakers believe they will need to tighten monetary policy further.

Officials now expect the fed funds rate to top out at 5.6% this year, implying two more 25 bps increases in 2023, up from the 5.1% estimate in the last set of forecasts released in March.

"As much as inflation is moving in the right direction, it is moving slowly, and the Fed remains frustrated with its inability to move the needle on the unemployment rate," said Chris Low, chief economist at FHN Financial in New York, in emailed comments.

"The biggest surprise in the statement and SEP (summary of economic projections) is not the pause or the intent to resume hiking, it is the amount the Fed wants to hike."

Low cited St. Louis Fed President James Bullard's comment last month that he saw at least another 50 basis-point increase.

"James Bullard came across as most hawkish a couple of weeks ago. ... Turns out, he is smack in the consensus."

Traders added to bets, now at more than 70%, the Fed will raise rates again next month after skipping a hike in June.

"If we compare it to the last time interest rates were at 5.25%, it may well be the case that rates remain here for a while," said Srijan Katyal, global head of strategy and trading services at international brokerage firm ADSS, by email.

He noted that in 2006, the fed funds rate stood at 5.25% from July 2006 to August 2007 before being cut in the wake of the global financial crisis.

The Fed's decision was supported by a report on Wednesday showing U.S. producer prices fell more than expected in May, with the annual increase in producer inflation being the smallest in nearly 2-1/2 years.

Data out Tuesday showed the U.S. consumer price index edged up 0.1% last month after increasing 0.4% in April. In the 12 months to May, the CPI climbed 4.0%, the smallest year-on-year increase since March 2021.

The European Central Bank's rate decision is up next on Thursday, with markets pricing in a 25 basis-point hike and another in July before a pause for the rest of the year.

The Bank of Japan, due to announce a monetary policy decision on Friday, is expected to maintain its ultra-dovish stance and yield curve control settings.

Elsewhere, sterling rose 0.4% against the dollar to $1.2660, after hitting its highest since April 2022 of $1.2699. The chances of the Bank of England delivering a half-point rise when it meets next week have reached 20% surprisingly strong wage-growth data on Tuesday.