Dollar gains on Fed confidence as US rates seen rising sooner

The dollar surged higher today after the Federal Reserve signalled confidence the US economic recovery remained on track while investors started to bet on an interest rate increase sooner than previously expected.

Language in the Fed's statement largely dismissed recent financial market volatility and focused on gradually improving labour markets. The Fed Open Market Committee (FOMC) however did not change its benchmark interest rate but did end its monthly bond purchase program that was put in place to help keep market interest rates low in order to spur lending and investment.

"The dollar-positive move you are seeing right now is relative to where the market was. This came in as a more optimistic and more hawkish statement in the fact that it didn't discuss greater risks to the US overall. It didn't seem to imply there was any real delay from what the Fed has communicated before," said Richard Cochinos, head of Americas G10 FX strategy at Citi in New York.

“The market pricing was for October of 2015 for the first Fed hike. FOMC language, and Fed present language has been for June 2015. So the market is now going to be taking some of its certainty off October and placing it more back towards June and that is ultimately going to be a dollar-positive currency move,” he said.

The dollar index, which measures the currency against a basket of major US trading partners, spiked to a three-week high in the wake of the statement. It traded up 0.64 per cent at 86.041.

Investors pulled the euro sharply down to a one-week low, dropping it to $1.2632 for a loss of 0.75 per cent on the day after it had gyrated above and below the unchanged mark for much of the session.

The dollar hit a three-week high of 108.94 yen before dipping back to trade at 108.76, up 0.57 per cent on the day.

A more hawkish Fed stance further pointed up the divergence in central bank monetary policies globally, where the United States is looking to raise interest rates while others, particularly in Europe, are looking to lower them or loosen policy to spur moribund growth.– Reuters