March 20, 2019 / 12:44 AM / 3 months ago

Dollar slammed by dovish Fed; pound remains weak

NEW YORK (Reuters) - The U.S. dollar fell sharply against a basket of major currencies on Wednesday, after the Federal Reserve held U.S. interest rates steady and its policymakers abandoned projections for further rate hikes this year as the central bank flagged an expected slowdown in the economy.

An employee counts U.S. dollar banknotes at a currency exchange office in Jakarta, Indonesia October 23, 2018. REUTERS/Beawiharta

In a major shift in its perspective, the Fed also now expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.

The dollar index, which measures the greenback against six major currencies, fell 0.6 percent to 95.806, its lowest since Feb. 4. The index briefly slipped below its 200-day moving average.

Against the yen, the dollar was down 0.6 percent, on pace for its worst day in more than two months.

“The dollar has come under pressure against a large number of currencies around the world,” said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.

“Overall it seems the Fed was able to solidify their dovish view as there are no rate hikes priced in for this year and only one rate hike for 2020,” he said.

“That was more dovish than people were expecting at the margin, even though the market was looking for a dovish Fed today,” said Tomes.

After a two-day policy meeting that sealed the switch to a less aggressive posture, the Fed also said it would slow the monthly reduction of its holdings of Treasury bonds from up to $30 billion to up to $15 billion beginning in May.

“The fact that they’ve announced balance sheet runoff ending I think is certainly quite dovish as well,” said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.

U.S. interest rates traders piled on bets the Fed would cut borrowing costs in early 2020, with the fed funds contract for January 2020 delivery implying traders are pricing in a 48 percent chance of a rate cut at the first Fed policy meeting of 2020.

The dollar clung to gains against sterling as investors remained wary over the prospects for the British currency as Prime Minister Theresa May requested a short delay to Brexit after her failure to get a divorce deal ratified.

Markets have largely priced out the chances of a no-deal Brexit but uncertainty about how and when Britain will leave the EU have capped any rally in the pound.

Reporting by Saqib Iqbal Ahmed; additional reporting by Karen Brettell; Editing by Marguerita Choy and Susan Thomas

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