Dollar holds gains as Fed stands pat, calls economy strong

NEW YORK (Reuters) - The U.S. dollar clung to gains against a basket of peers on Wednesday after the U.S. Federal Reserve kept interest rates unchanged but characterized the economy as strong, keeping the central bank on track to increase borrowing costs in September.

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

“The dollar and broader financial markets were initially little changed following the Fed’s announcement, which does little to change the outlook for two more dollar-supportive rate increases this year and, likely, quarterly hikes in 2019,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The Fed said economic growth has been rising strongly and the job market has continued to strengthen while inflation has remained near the central bank’s 2 percent target since its last policy meeting in June, when it raised rates.

The Fed currently expects another two rate rises by the end of the year.

“It came in pretty much as expected. There were no major surprises,” said Mark Grant, managing director and chief global strategist at the investment bank B. Riley FBR.

The dollar index, which measures the greenback against a basket of six currencies, was up 0.14 percent at 94.629.

Meanwhile, fears of an escalation in the trade dispute between the United States and China, and higher U.S. Treasury yields supported the greenback.

Worries about what an escalation in the months-long dispute would mean for the Chinese and then the global economy led investors to buy the dollar and sell currencies linked to China’s economic fortunes.

The U.S. administration plans to propose a 25 percent tariff on $200 billion in Chinese imports, up from an original 10 percent, to pressure Beijing into making trade concessions, a source familiar with the matter said. China has vowed to retaliate.

The offshore Chinese yuan slid more than half a percent on reports of the new tariffs. A survey showing Chinese manufacturing grew at the slowest pace in eight months in July also hurt the currency.

The Aussie dollar, seen as a proxy for Chinese growth because of Australia’s export-reliant economy, slipped against its U.S. counterpart.

While an extended trade war could be a negative in the longer term, in the very near term simmering trade-related tensions are supportive of the greenback, said Minh Trang, senior foreign currency trader at Silicon Valley Bank in Santa Clara, California.

The yen, which tends to rise during periods of geopolitical or financial stress, edged higher against the greenback.

The euro slipped 0.25 percent to $1.1662, under pressure from the stronger dollar and a Purchasing Managers’ Index survey that showed factory output was growing but had nudged up only slightly from June’s 18-month low.

Sterling GBP= was little changed on the day ahead of a Bank of England policy decision on Thursday that is widely expected to raise interest rates for the second time since the global financial crisis.

Reporting by Saqib Iqbal Ahmed; Additional reporting by Gertrude Chavez-Dreyfuss and Jennifer Ablan; Editing by Marguerita Choy and Jonathan Oatis