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Dollar jumps after strong economy keeps Fed on track for December hike

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11/08/2018 | 09:00pm CET
A money changer counts U.S. dollar banknotes at money change market in Herat province

NEW YORK (Reuters) - The U.S. dollar strengthened against the euro on Thursday after the Federal Reserve held rates steady as expected, and said strong jobs and spending kept the economy on track, setting up for a rate hike in December.

The central bank's statement reflected little change in its outlook for the economy since the last policy meeting in September, with inflation remaining near its 2 percent target, unemployment falling and risks to the economic outlook appearing to be "roughly balanced."

The euro was down 0.46 percent on the day against the greenback, which had risen ahead of the announcement.

"The dollar had rallied into the statement, so it’s not clear how much more juice it will get with the Fed coming in as expected," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York.

Against the euro, the dollar initially weakened as analysts said traders fixated on the slightly dovish comment that business investment had "moderated from its rapid pace earlier in the year," which could act as a possible drag on future economic growth. But it soon rebounded as "apart from that they have not signalled any warning signs at all," said Schlossberg.

The gains against the yen were less notable, with the dollar at roughly the equivalent to 113.91 yen, down from the day's low, but still weaker than the peak hit earlier at 113.46. The dollar has gained over the past week against the yen due to divergence in the monetary policies of the U.S. Fed and the Bank of Japan.

Against a basket of six rival currencies, the dollar index was up 0.6 percent from late Wednesday <.DXY>. The index had fallen in the wake of the U.S. midterm elections, which split power between the two houses of Congress. Democrats’ control of the House of Representatives suggests they will act as a check on President Donald Trump and could block further tax cuts and deregulation.

The greenback has rallied this year since the president’s Republican Party pushed through significant tax cuts, and strong economic growth has prompted the Fed to steadily raise interest rates.

Earlier on Thursday, the euro fell after the European Commission cut its forecasts for Italian growth, adding to investor concerns about Italy's debt and economic outlook.

(Reporting by Kate Duguid; Additional reporting by Tommy Wilkes in London; Editing by Lisa Shumaker)

By Kate Duguid

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