US Dollar Drops as FOMC Turns Hawkish on Inflation, Dovish on Growth

Fed Votes to Keep Interest Rates Unchanged, But a June Hike Is Likely

"I'd call what the market is doing a sigh of relief because we didn't get an unexpected hike", said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

In Wednesday's statement, Fed officials said that inflation had "moved close" to the central bank's annual 2 percent target.

Where the US Dollar could head from here is a tough question to answer, especially when you consider how stunned most investors were by the unexpected turnaround in Dollar momentum over the past couple of weeks.

No doubt this is because over the near term, inflation is accelerating to the upside: On a three-month annualized basis, core PCE inflation is rising at a 2.6 percent rate.

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"There wasn't any particular news to get it going other than the Fed staying the course, and that contributed to the slide in stock prices", said Robert Pavlik, chief investment strategist, senior portfolio manager at SlateStone Wealth LLC in NY.

The price index for personal consumption expenditure (PCE), an inflation gauge preferred by the Fed, rose 2 percent from a year ago in March, the biggest increase since February 2017, according to the latest data from the Commerce Department.

The challenge for central bankers is to lift borrowing costs enough to prevent the economy from overheating, but not so much that it tips into recession.

The dollar has begun to pare its early gains against its major rivals Wednesday afternoon, following the conclusion of the Federal Reserve's policy meeting. But the greenback later reversed course to trade higher.

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The Dow Jones Industrial Average.DJI rose 5.17 points, or 0.02 percent, to 23,930.15, the S&P 500.SPX lost 5.94 points, or 0.23 percent, to 2,629.73 and the Nasdaq Composite.IXIC dropped 12.75 points, or 0.18 percent, to 7,088.15. A Trump administration delegation is scheduled to visit Beijing on Thursday and Friday for talks with top Chinese officials. Investors had all but ruled out another increase at this week's meeting.

E-Mini futures for the S&P 500 crept 0.3 percent higher, with overnight results from Kraft Heinz, Tesla, and Spotify in focus. Unum shares fell 16.6 percent. The blue-chip CSI 300 was up 0.8 percent, but not far from an eight-month low hit in April.

A report released by payroll processor ADP on Wednesday showed private sector employment in the U.S. increased by slightly more than anticipated in the month of April.

In the Treasury market, yields dipped slightly as a quarterly refunding programme of $73 billion came in short of expectations, reducing the pressure on prices from the torrent of supply. Again, the Easter effect is partly to blame, with services price inflation falling to just 1.0% year over year from 1.5% year over year in the previous month and against that background our medium term inflation outlook has not changed and we don't expect the central bank to scrap the intended exit from QE.

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As per official data, inflation in the United States rose 1.9 per cent in the 12-month period up to March.

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