Dollar Hits 6.5-Month High as Central Banks Adjust Rates

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The dollar reached a 6.5-month peak on Thursday, September 21, 2023, after the U.S. Federal Reserve signaled a continuation of its restrictive policy, even as it held rates steady. This comes as the Swiss franc fell following the Swiss National Bank's decision to maintain unchanged rates, marking the first time it has not increased rates since March 2022.

On Wednesday, the Fed met market expectations by keeping interest rates within the 5.25%-5.50% range. The U.S. central bank, however, reinforced a hawkish monetary policy stance that its officials believe can mitigate inflation without damaging the economy or causing significant job losses.

The Fed's updated projections indicate tighter rates through 2024 than previously anticipated. Niels Christensen, chief analyst at Nordea, noted that the Fed was more hawkish further out on the curve with the dot plots signaling just 50 basis points of cuts in 2024. He added that the dollar should remain well-supported until we start seeing softer data.

In Europe, Sweden's Riksbank and Norway's central bank both raised rates by 25 basis points, in line with market expectations. Meanwhile, the pound sank to its lowest since April ahead of the Bank of England's policy announcement later in the day.

The yen was at its lowest since November before Friday's Bank of Japan policy announcement. Despite this, Matt Simpson, senior market analyst at City Index, expressed doubt that any change in policy would be announced by the Bank of Japan in their Friday meeting.

Both the Australian and New Zealand dollars fell following the Fed's meeting. However, the Kiwi found some support after data released on Thursday showed that New Zealand's economy grew more than expected in Q2 2023.

In other news, European equities stumbled after the U.S. Federal Reserve signaled it might have at least one more rate hike in store after its historically rapid run-up in rates over the last 18 months. This was compounded by the Swiss National Bank's surprise decision to keep its rates steady and Norway's central bank signaling a potential rate hike in December.

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