Dollar edges higher as Fed outlook lifts U.S. yields

(Reuters) – The dollar firmed against major currencies on Thursday following the U.S. Federal Reserve’s upbeat assessment of the economic recovery and as its increased tolerance for higher inflation pushed Treasury yields higher.

At its policy meeting, the Fed pledged to keep rates near zero until at least the end of 2023 when the labour market reaches “maximum employment” and inflation is on track to “moderately exceed” the 2% inflation target.

The Fed also expects economic growth to improve from the coronavirus-induced drop they projected in June.

Against six major currencies, the dollar index rose about 0.32% to trade at 93.493 =USD and changed hands at 1.1763 against the euro, EUR=EBS which briefly hit a one-month low.

The greenback initially fell after the Fed’s announcement and weaker-than-expected U.S. retail sales data, but swung into positive territory after Chair Jerome Powell’s comment on the economic outlook.

Broad dollar buying followed after the benchmark 10-year U.S. Treasury yield rose above 0.7% overnight, a reaction resembling that of the Fed’s Jackson Hole symposium last month, said Mitsuo Imaizumi, chief FX strategist at Daiwa Securities.

“It’s the same reaction the market had when Fed Chair Powell introduced a new framework last month, and longer-term yields went up after the announcement. Based on the higher interest rates, I think people are feeling they won’t be able to sell the dollar,” he said.

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