Interest rate hike buoys USD

The Federal Reserve voted today to raise the benchmark federal funds rate by 25 basis points to 4%, which represents the 12th consecutive rate hike. As expected, the USD received broad support from the announcement, as interest rate differentials among developed nations increasingly favor the US. However, since the Fed has made an effort to increase transparency by telegraphing interest rate hikes, this move came as no surprise to most investors. Moreover, it is expected that the Fed will continue to raise its interest rate until it reaches 4.5%. While each successive rate hike will lead more risk-averse investors to shift capital to the US, the future rate hikes have already been priced into the USD and will not likely be enough to lift the USD out of its trading range. The Financial Times reports:

RBC Capital Markets argued that “rising US rates alone will not guarantee further broad based appreciation in the dollar, especially if yield appetite declines and/or risk aversion climbs markedly”.

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