Dollar drops after Fed raises rates and indicates gradual increases

THE dollar fell the most in one week after the Federal Reserve (Fed) raised interest rates for the first time in almost a decade, while signalling the central bank would not rush to reduce monetary stimulus.

The greenback weakened against most of its major peers falling 0.6% to $1.0999 against the euro in late afternoon trade in New York, after gaining as much as 0.3%. This followed the federal open market committee saying that the pace of subsequent increases would be gradual and in line with previous projections.

Fed chairwoman Janet Yellen said yesterday’s first rate increase since 2006 marked the “end of an extraordinary seven-year period” of easy money policy begun in the Great Recession.

She stressed that it was “important not to overblow the significance” of the quarterpoint rate increase, saying Fed policy remained accommodative in the medium term.

The central bank’s policysetting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25% and 0.50%, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

“The committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2% objective,” the Fed said in its policy statement.

It made it clear that the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move, it would put a premium on monitoring inflation, which remains mired below target.

“In light of the current shortfall of inflation from 2%, the committee will carefully monitor actual and expected progress toward its inflation goal. The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the Fed said.

John Ashbourne of Capital Economics said the decision was expected and priced into the markets.

“It’s possible that there might be a brief period of volatility as markets absorb the news, particularly for emerging market currencies — like the rand,” he said.