Dollar gains as Fed leaves rates unchanged

By Chibuike Oguh

NEW YORK, March 18 (Reuters) - The U.S. dollar strengthened against other major currencies on Wednesday, on track to claw back losses from the past two sessions after the U.S. Federal Reserve left interest rates unchanged. 

The Fed projected higher inflation as well as one interest rate cut for the year as officials weighed the economic impact of the U.S. and Israeli war on Iran.

The dollar has strengthened overall since the Middle East conflict almost three weeks ago, reaching a 10-month high late last week as the conflict and rising oil prices drove investors into safe-haven U.S. assets.

"The consistent tone, paired with a fresh set of projections showing lower growth, weaker employment, and higher inflation than in December, marks the clearest signal yet that Chair Jay Powell’s Fed sees higher energy prices playing a temporary, but demand-destructive role in the U.S. economy," said Karl Schamotta, chief market strategist at Corpay in Toronto.

The dollar strengthened 0.92% to 0.792 against the Swiss franc. The euro was down 0.5% at $1.148.

The Fed didn’t change expectations of where rates will be heading or that Treasury markets are headed in the wrong direction, which is positive for the dollar, said Joseph Trevisani, senior analyst at FX Street in New York.

"It’s a hawkish hold and the main reason for that is because the base case going forward was still one rate decrease in 2026 and although that hasn’t changed, treasury rates are higher than they were two or three months ago," Trevisani said. 

The dollar index was up 0.51% to 100.0.

In his press remarks following the Fed decision, Chair Jerome Powell said the central bank will look through the impact of higher oil prices induced by the conflict if there’s more progress this year in bringing down core inflation driven by goods prices.

Prior to the Fed’s decision, data from the U.S. Labor Department showed that the Producer Price Index surged 0.7%, while economists polled by Reuters had forecast a 3% rise.

YEN INCHES TOWARD INTERVENTION ZONE

Other major central banks are poised to announce their rate decisions this week, including the European Central Bank, Bank of England and Bank of Japan.

They are all widely expected to maintain interest rates but traders will look for clues on where borrowing costs are heading amid a potential inflationary shock from the Middle East war.

The Japanese yen JPY= weakened 0.43% against the greenback to 159.7 per dollar. The yen is trading near its 2024 intervention zone, triggering worries that Japanese authorities might step in again.

Sterling GBP= was down 0.46% at $1.3292.

The dollar strengthened 0.19% to 6.894 versus the offshore Chinese yuan.