FX round-up: US dollar jumps to strongest since 2003, euro loses technical support

The US greenback powered ahead to its strongest level since 2003 in the wake of the US central bank’s policy announcement.

As of 1643 GMT, the US dollar spot index was up 1.55%, and just off its best levels of the day, to 103.34.

Overnight, the Federal Reserve signalled there was now a modestly greater probability of three interest rate hikes in 2017, up from the two seen by the median of US rate-setters at their September meeting.

To take note of too, there continued to be some dispersion between economists in their reactions to the Fed’s decision, although the dominant theme appeared to be clearly that the Fed was now reacting to the prospect of higher fiscal spending in the States.

“The USD may have been ahead of the Fed in digesting what the US election result might mean for growth, but it will still likely strengthen further on the Fed’s swifter than expected conversion to a possible fiscal reflation theme. The flipside to the bullish USD reaction is likely to be broad additional selling pressure on other currencies, including EM FX,” strategists at HSBC said.

For their part, Michael Gapen and Rob Martin at Barclays Research chipped in: “In all, the statement is somewhat, but not extremely, hawkish relative to our expectation. […] three rate hikes are indeed possible only if the new administration does not enact tariffs or other trade restrictive policies in the first months of 2017. In our view, the slowdown in growth early in the year associated with tariffs would preclude an early year rate hike.

“Likewise, if the administration enacts a large tax and spending bill that substantively boosts activity and inflation, subsequent dot charts could show a much steeper path of policy hikes.”

Cable slumped 1.16% to 1.2405, but among the ‘majors’ it was euro/dollar which saw the largest drop, falling 1.43% to 1.0381.

The single currency was this well below its lows of 2015, at 1.04610, with traders waiting to see if it would hold below that level by the end of the week, which in theory might open for a further move lower.

Dollar/yen for its part continued to power ahead, rising 1.08% to 118.40 as the interest rate differential in favour of the US dollar continued to widen.