Dollar rallies after Fed signals June rate hike likely

The Federal Reserve held interest rates steady on Wednesday and hinted at an upcoming hike in June.

"The June hike looks pretty much alive", said Win Thin, global head of emerging markets currency strategy at Brown Brothers Harriman in NY. That's the level of inflation they view as best for the US economy.

Year-on-year, GDP in the single currency bloc rose 1.7% in the first quarter, matching expectations.

The Fed didn't clarify its timetable for paring its balance sheet in the statement it issued Wednesday. At the time, the Fed had already cut its short-term rate to a record low. Prices of oil, one of Canada's major exports retreated from earlier highs in choppy trade after US government data showed a smaller-than-expected decline in domestic crude inventories and weak demand for gasoline, feeding concerns about a supply glut.

US stocks held modest losses following the announcement.

"Fortunately, with markets already pricing in a June rate hike at 66%, the Fed doesn't have to work as hard to manage expectations as it did earlier this year and so any signal may be fairly subtle", Oanda market analyst Craig Erlam said. The consumer spending data was included in last Friday's first-quarter gross domestic product report, which showed consumer spending increasing at a 0.3 percent annual rate - the slowest pace since the fourth quarter of 2009.

"They went out of their way to emphasize this is not something they see persisting and pretty much says to me that their two rate hikes are still on the table for the balance of the year", said Heidi Learner, chief economist at Savills Studley.

The decision to leave the target federal funds rate unchanged in a range of 0.75 percent to 1 percent was unanimous and widely expected by investors.

Payrolls processor ADP reported that US private employers expanded their payrolls by 177,000 jobs last month, the smallest gain since last October as they faced increasing difficulty finding qualified workers. Core PCE is the Fed's preferred inflation measure and is below its target.

"We view much of the weakness in March as driven by one-off factors and expect inflation to firm on a monthly basis in the very near term", said Rod Martin, an economist at Barclays in NY.

Last month, almost every sub-index of the ISM index fell.

Apple shares fell 0.4 percent, weighing on indexes, but recovering from steeper losses after the company's quarterly report, in which it reported a surprise fall in iPhone sales. In the 12 months through March the PCE price index increased 1.8 percent after rising 2.1 percent in February. Job growth also slowed sharply in March.

  • Zachary Reyes