Dollar jumps as Fed holds rates but projects one hike later this year

The dollar strengthened across the board on Wednesday after the Federal Reserve held the benchmark interest rate steady and the Fed‘s statement showed policymakers expect a hike in borrowing costs later this year amid growing concerns about inflation.

While the central bank left the policy rate in the 3.50%-3.75% range, new quarterly projections showed nine Fed officials now anticipate a rate hike by the end of 2026, and an updated policy statement removed language that had been used to flag the likelihood of further reductions in borrowing costs in 2026.

The statement, in an early sign of new Fed Chairman Kevin Warsh‘s influence, removed any guidance about future rate moves altogether, with a revised ‌format that simply stated ⁠the rate ⁠decision and reaffirmed the central bank’s intent to keep “ample reserves in the banking system.”

“This Fed decision was short, but not sweet,” Karl Schamotta, chief market strategist at Corpay in Toronto, said.

“Kevin Warsh moved swiftly to put his stamp on the central bank’s communication strategy by executing a dramatic revision to the official statement, wiping out anything resembling forward guidance and editing out the bulk of the contextual information typically parsed most closely in financial markets.”

The Fed statement showed the outlook for inflation was marked up from 2.7% for the end of 2026 to 3.6%.

“The committee turned sharply hawkish, with the median participant yanking inflation projections much higher – suggesting that officials don’t expect this weekend’s U.S.-Iran deal to result in a serious easing in price pressures – and penciling in at least one hike this ⁠year, marking a ‌stark contrast with the cut previously expected,” Schamotta said. “Markets are taking it on the chin, with yields moving up in line with rate expectations, the dollar advancing against all of its major rivals, and equity markets tumbling,” he said.

The dollar index, which measures the greenback ⁠against a basket of currencies including the yen and the euro, rose 0.5% to 100.01, the highest in nearly a week. The euro fell 0.5% to $1.1549.

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Short-term U.S. interest-rate futures are now pricing in a bigger chance that the Federal Reserve will deliver a rate hike by September than opt to keep rates where they are.

An interim agreement to end the Iran war has pushed oil prices lower and should help ease some inflationary pressure in the months ahead, though the pass-through to consumer energy prices may take time.

Warsh, appointed by President Donald Trump, has suggested he will adopt a different governing approach from his predecessor Jerome Powell, who remains a voting member of the FOMC as a governor.

The dollar showed little reaction to data released on Wednesday showing U.S. retail sales increased more than expected in May.

BOE AND BOJ

The Bank of England meets on Thursday and, ‌as with the Fed, no change in policy is expected, leaving the focus on the tone of policymakers’ commentary.

That commentary could be shaped in part by Wednesday’s UK inflation data, which showed inflation unexpectedly held at 2.8% in May, unchanged from the 13-month low reached in April. Markets currently see one BoE rate hike by ⁠year-end.

Sterling was last down 0.5% at $1.3361.

The yen pared gains from earlier in the session to trade up about 0.05% to 160.385 per dollar, still keeping traders on alert for potential intervention by Japanese authorities to support the persistently weak currency.

The BOJ on Tuesday raised rates to a 31-year high in a landmark step in its policy normalization, signaling readiness to tighten further as it focuses on taming price pressures from the war-induced energy shock. However, policymakers offered few clues on the timing of the next move.

Sweden’s crown weakened after the Riksbank held its policy rate unchanged. The central bank said the Iran war had intensified inflationary pressures, raising the likelihood of a future rate hike, while also noting that underlying inflation remained subdued and economic activity was somewhat below normal.

The Swedish crown was last down 0.8% versus the dollar at 9.4382.

Leading cryptocurrency bitcoin was about flat on the day at $65,834.