U.S. Markets

Dollar drops after Fed holds rates steady, risk assets gain

NEW YORK (Reuters) - The dollar weakened on Wednesday and risk assets benefited after the U.S. Federal Reserve announced it held interest rates steady in June, but signaled a possible rate cut by the end of the year.

Responding to an increase in economic uncertainty and a drop in inflation, the U.S. central bank said it “will act as appropriate to sustain” the American economy’s expansion as it approaches the 10-year mark and dropped a promise to be “patient” in adjusting rates. Nearly half its policymakers now show a willingness to lower borrowing costs over the next six months.

Seven of 17 policymakers said they expected it would be appropriate to cut rates by half a percentage point by the end of 2019, and an eighth member saw a rate cut of a quarter point as appropriate.

Against the euro, the dollar was down 0.38% to $1.123, and against the pound it was down 0.77% to $1.265. The dollar index , which measures the currency against a basket of six rivals, was down 0.45% to 97.121. The drop slowed as the market digested the news, and some initial losses were retraced.

“This was a bit more dovish than what people were expecting and that’s evident in how the market responded, especially in terms of interest rates - the two-year falling, equities responding positively and the dollar weakening,” said Jason Draho, head of Americas asset allocation at UBS Global Wealth Management.

The 2-year Treasury yield, which moves with expectations of changes to interest rates, fell near 1-1/2-year lows hit earlier this month. U.S. stock indexes turned higher, with the S&P 500 last up 0.31%.

“For the Fed, which tends to move relatively slowly, this is a sizable move. What they have done by removing the word ‘patient’ from the statement is make July into a live meeting where if the data continues to deteriorate, if there are worries about growth because of trade concerns, they would be prepared to cut rates in July,” said Draho.

Reporting by Kate Duguid; Editing by Chizu Nomiyama and Jonathan Oatis