Dollar lifted as Fed raises odds for December rate hike

Against the dollar, the euro was lower at $1.0918, having lost 1.2 percent on Wednesday, after the Fed, which kept its rates on hold as expected, took an unusual step of strengthening its language about timing in its statement, bringing a December rate hike back on the table.

The Fed’s hawkish tone came as a surprise, prompting an increase in the odds of a December hike to 43 percent from the 38 percent minutes before the release of the statement, according to the CME Group’s FedWatch program. A statement that the Fed issued said that it would monitor job growth and inflation to determine whether it would be appropriate to raise the target range for its benchmark at its next meeting.

The USA dollar rose sharply and yields for US government debt soared in anticipation of higher rates.

Speaking to Reuters, economists said the Fed was testing the water and trying to subtly hint to the market its intentions, possibly to avoid a taper tantrum similar to 2013.

Logan interpreted this statement to mean a December decision will be heavily contingent on the two employment reports and the inflation reports to be released between now and the December 15-16 Fed meeting.

US crude rose 0.4 percent to $46.11 a barrel.

Even so, said Jason Schenker at Prestige Economics, “today’s Fed statement further confirmed that the FOMC’s finger is on the rate hike trigger”.

Rather than saying, as before, that global developments “may restrain [US] economic activity somewhat”, the committee simply said it is “monitoring global economic and financial developments”.

Compounding the situation, central banks from the euro zone to China are easing monetary policy, keeping upward pressure on the USA dollar.

Although sterling edged a little lower on Thursday, to 71.65 pence, it stayed close to that high, and was 0.2 percent higher against the dollar, at $1.5300.

Status quo of the Federal Reserve on United States interest rates will provide more space to emerging economies to deal with possible rate hike in the future, the Finance Ministry said on Thursday. But many analysts point to a string of weaker-than-expected economic reports in recent weeks that they think will lead the Fed to delay any rate increase until 2016. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. As he had in September, Lacker favored a quarter-point rate increase. It also repeated its warning that it wants to be “reasonably confident” that now ultra-low inflation will rise to its 2% target before it raises rates.

The Fed’s stance contrasts with the European Central Bank’s after President Mario Draghi last week primed investors for an expansion of quantitative easing and the possibility of another cut in the deposit rate. The most basic measure of the health of a national economy – its economic output – shows why they’re being cautious before lifting interest rates for the first time since 2006.