Dollar weakens after Fed dampens taper hopes, cautious U.S. outlook

FILE PHOTO: A U.S. dollar note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The dollar slid on Wednesday after the Federal Reserve doused hopes of an early reduction in its monthly bond purchases and struck an overall cautious tone about the outlook on inflation and the overall economy.

At the end of a two-day Federal Open Market Committee meeting, the Fed, as expected, held interest rates unchanged but did acknowledge the improvement in the U.S. economy.

Fed Chair Jerome Powell, in remarks after the central bank statement, said it was not the time to talk about tapering its asset purchases. That triggered a further slide in the dollar.

The greenback had rallied in conjunction with the rise in U.S. Treasury yields on the view that a successful vaccination program and strengthening economic data would prompt the Fed to talk about reducing its bond purchases sooner rather than later.

"Powell threw cold water on talking about tapering," and that has been the main driver in the move lower in the dollar, said Ron Simpson, managing director, global currency analysis at Action Economics in Tampa, Florida.

U.S. 10-year yields slipped to 1.618% in the wake of Powell's comments.

"The path of the economy will depend significantly on the course of the virus, including progress on vaccinations," the Fed said in its statement. "The ongoing public health crisis continues to weigh on the economy and risks to the economic outlook remain."

In late afternoon trading, the dollar fell 0.3% to 90.576.

The euro rose 0.3% to $1.2126, while the dollar slipped 0.1% against the Japanese currency to 108.59 yen.

"As it stands, there is nothing here to change our view that the Fed won't begin to taper its monthly asset purchases until the start of next year and won't begin to raise interest rates until late 2023," said Paul Ashworth, chief U.S. economist at Capital Economics, in a note sent after the Fed statement.

Powell also reiterated that the rise in inflation this year was transitory and that would not meet the standard for raising interest rates.

Still, the eurodollar and fed funds markets, which track short-term interest rate expectations, on Wednesday have fully priced Fed tightening in March 2023. Eurodollar futures also show a more than 90% chance of a Fed hike by December 2022.

That was the same expectation before the Fed statement.

"At some point, U.S. inflation will pick up and Powell was very clear about that," said Action Economics' Simpson. "But I don't think it's going to happen overnight and when it does, that's the time when Treasury yields will be moving higher again," and the dollar will move higher with them.

In the cryptocurrency market, ethereum hit a fresh record high of $2,747.01 on Wednesday in the wake of news that the European Investment Bank has raised 100 million euros ($121 million) from a two-year digital bond sale on the public ethereum blockchain network.

Ethereum is the second largest cryptocurrency in terms of market capitalization, currently at $316.5 billion, according to data tracker CoinGecko.com.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci and Sonya Hepinstall)

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