U.S. Markets

Dollar surges after Fed raises rates, signals faster rate hike pace

U.S. dollar notes are seen in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

NEW YORK (Reuters) - The U.S. dollar hit its highest level against a basket of major currencies in nearly 14 years on Wednesday after the Federal Reserve raised interest rates for the first time this year and signaled a faster pace of increases in 2017.

The dollar index hit 102.350, its highest level since early January 2003, after the U.S. central bank raised the target federal funds rate by 25 basis points to between 0.50 percent and 0.75 percent and projected three rate hikes next year from two as of September.

The index, which gained about 1.3 percent, measures the dollar against a basket of six major currencies. The Fed’s last hike was a year ago, when it increased rates from the zero lower bound reached during the 2007-2009 financial crisis.

All 120 economists in a recent Reuters poll had expected Wednesday’s rate hike. Of more significance to markets were new forecasts for future rates. Analysts said that just one additional rate increase projected into next year, combined with a cautious tone in the policy statement, boosted the dollar without sending it excessively higher.

“The rise in the dollar is really being driven by the shift from two to three hikes next year, which obviously isn’t priced by the market,” said Ian Gordon, FX strategist at Bank of America Merrill Lynch in New York.

“The overall tone of the statement is generally still somewhat cautious,” Gordon added. He cited the Fed’s reference to risks to the economic outlook as having been roughly balanced, as well as discussion of the shortfall in inflation, as examples.

The euro fell about 1.2 percent against the dollar EUR= to $1.0497, its lowest level since mid-March of last year, easing from a six-day high of $1.0669 touched before the Fed decision. The dollar rose nearly 2 percent against the yen to a 10-month high of 117.38 yen JPY=.

The dollar hit a more than 10-month high against the Swiss franc of 1.0223 francs CHF=. Sterling GBP=D4 fell about 1 percent against the dollar to a nearly two-week low of $1.2530.

“The game was higher U.S. yields, which has been in place for some time, a higher dollar against core defensive currencies like the euro and the yen, and that trend persists,” said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York, on the Fed decision.

Reporting by Sam Forgione; Editing by James Dalgleish and Meredith Mazzilli