September 25, 2018 / 1:57 AM / 2 months ago

Dollar gains on Fed rate outlook; euro falls

FILE PHOTO - U.S. dollar and Euro banknotes are seen in this picture illustration taken May 3, 2018. REUTERS/Dado Ruvic/Illustration

NEW YORK (Reuters) - The dollar rose to its highest in more than a week against a basket of major currencies on Thursday, boosted by the Federal Reserve’s outlook for more rate hikes beyond this year as the euro weakened on worries about the Italian budget.

The greenback reached a four-week peak against the Swiss franc and a two-week high versus the Canadian dollar.

On Wednesday, the Fed raised rates for the third time in 2018, as expected, and said it still foresees another rate hike in December, three more next year, and one in 2020. The dollar rose even though the Fed statement dropped the word “accommodative.” Some analysts called this a signal the Fed would move to a neutral stance, but Fed Chairman Jerome Powell later said policy was still accommodative.

“The Fed removed ‘accommodative’ in its statement and people are saying that we are moving closer to neutral, I think that will be eventually become a factor supporting foreign currencies against the dollar,” said Erik Nelson, currency strategist, at Wells Fargo Securities in New York. “But I am not sure we’re there yet.”

In afternoon trading, the dollar index rose 0.7 percent to 94.875 .DXY.

Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington, said that while the Fed’s policy tightening bias is dollar-positive, the U.S. central bank’s forecast of low and stable inflation over coming years is likely to limit the dollar’s upside.

The euro dropped 0.7 percent to $1.1653 EUR=, after hitting a session low of $1.1643, its weakest since Sept. 19, on a report by the Corriere della Serra that an Italian budget meeting was likely to be delayed. That spooked traders concerned that Italy's ruling parties will push for a bigger deficit target.

The euro fell further when a source in the prime minister’s office said Italy’s government has agreed to target next year’s budget deficit at 2.4 percent of gross domestic product.

The dollar rose to four-week highs of 0.9782 franc CHF= against the Swiss currency and was last up 1.2 percent at 0.9770. Against the Canadian dollar, the greenback climbed to a two-week peak of C$1.3081 CAD= and last changed hands at C$1.3031, up 0.1 percent. The Canadian dollar was pressured when U.S. President Donald Trump criticized Canada over the slow pace of talks on the North American Free Trade Agreement.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Stephen Orlofsky and David Gregorio

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