US dollar touches two-decade high on Fed’s decision

The dollar soared to two-decade high on Wednesday after the Federal Reserve raised interest rates by another 75 basis points signaling more large increases at its coming meetings.

The dollar’s gains were limited since the Fed decision was widely expected. Since US rates will be higher for longer, the trend remains dollar-supportive for some time. The Fed’s new projections showed its policy rate rising to 4.4% by the end of the year, before peaking at 4.6% in 2023 to curb high inflation. Rate cuts are not expected until 2024.

The dollar index hit a fresh 20-year high of 111.09 at the time of writing and earlier immediately after Fed’s announcement, the index recorded 111.63. The US dollar is expected to stay firm in the short run.

Some economists believe that the dollar has become significantly overvalued. Since the beginning of the year, the dollar index has soared nearly 16%, the largest yearly percentage gain since 1972, when Refinitiv started the data series.

Higher US rate expectations have already been priced in the dollar, with the peak fed funds rate, or the US central bank’s policy rate, having advanced by more than 100 bps since August.

The Euro dropped to a 20-year low, hitting $0.9810, down 1.2%. Against the yen, the dollar posted minor gains compared to other currencies, rising as high as 144.695 yen. The dollar last traded at 143.98 yen, up 0.2% on the day. Traders are worried of pushing the dollar higher given the threat of Japan intervention to boost the yen.

The Sterling fell to a new 37-year low of $1.1237 and last traded at $1.1272, down nearly 1%. Earlier in the US session, the dollar posted gains after a decision by Russian President Vladimir Putin to mobilize more troops for the conflict in Ukraine.

European currencies were impacted by wide selloffs on Putin’s comments which worsened the existing concerns about the economic outlook for a region already hit hard by Russia’s squeeze on gas supplies to Europe.