The dollar was firmer, easing off its recent lows against major currencies after the Federal Reserve last night suggested that further rate hikes are still possible.
As expected the Federal Reserve Open Market Committee raised interest rates by 25 basis points to 5.0 pct. Although it still left the door open to a possible pause, the FOMC continued to maintain that further policy tightening "may be needed" in order to address inflation risks, which will be dependent on forthcoming data.
"The statement accompanying the Fed's latest decision to increase interest rates by 25 bp noted that "some further policy firming may yet be needed to address inflation risks", a reminder that lent this release a mildly more hawkish tone than might have been anticipated," said Daragh Maher at CALYON. Nevertheless, the dollar's "partial bounce" on the back of the Fed's effective tightening bias will not be sustainable if US economic data come in on the weak side, he said.
The dollar also gained support from last night's other major event for currency markets -- the US Treasury report on currency activities, where it stopped short of labelling China as a currency manipulator.
There had been fears that the dollar would fall sharply against the yen if China had been tagged a manipulator and that trade ties would deteriorate.
However, many analysts feel that the move may be more not less likely to result in the Chinese yuan appreciating against the dollar. Bullying China may have been counterproductive and the Chinese authorities may now be more amenable to allowing their currency to rise.
"The US administration ... appears to understand that threatening/bullying China is counter-productive," said Steve Pearson at HBOS.
The risk for the dollar now stems from a potential protectionist backlash in Congress, but further gains in the yuan from now "could well put the matter to bed", he said.