May 2, 2018 / 12:54 AM / 23 days ago

Dollar dips as Fed seen more likely to tolerate inflation

NEW YORK (Reuters) - The U.S. dollar fell from 2018 highs set earlier on Wednesday after the Federal Reserve indicated it may allow inflation to run above its 2 percent target, raising concerns that monetary accommodation will stay loose even as they hike rates.

FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

The U.S. central bank held interest rates steady and in a statement following the end of a two-day policy meeting said that inflation had “moved close” to its target and that “on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.”

“Markets are pretty much focused on the symmetric language, that’s kind of code for willing to let them overshoot their inflation target,” said Mark McCormick, North American head of fx strategy at TD Securities in Toronto.

“If inflation moves higher and they don’t respond to it, they are essentially keeping the accommodation in the economy the same,” McCormick said. “That’s negative for the dollar because ... the dollar needs higher real rates to essentially pull in the funding from the rest of the world.”

Real rates adjust for the impact of inflation.

The dollar index .DXY turned negative on the day, falling 0.10 percent to 92.358, after rising before the Fed statement to 92.718, the highest level since Dec. 28.

The greenback has been bolstered in recent weeks by the expectation that the Fed will continue to raise rates while other central banks, including the European Central Bank, are seen as taking longer to normalize monetary policy.

Investors had been betting the euro would appreciate against the U.S. currency as the ECB removed stimulus, before a spate of weaker-than-expected data made this less likely in the nearer-term.

Investors are next focused on Friday’s U.S. employment report for April for further indications of the strength of the economy and inflation pressures.

U.S. private-sector employers hired 204,000 workers in April, the smallest monthly increase since November, the ADP National Employment Report showed.

Reporting by Karen Brettell; editing by Jonathan Oatis

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