Dollar slumps after Fed meeting; Sterling rises ahead of BOE

© Reuters.

By Peter Nurse

Investing.com - The U.S. dollar slumped to a seven-week low in early European trade Thursday following the latest Federal Reserve interest rate increase, while the pound surged ahead of a Bank of England get-together.

At 04:05 ET (08:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 101.763, just above levels last seen in early February.

The Fed raised its benchmark funds rate by 25 basis points, as widely expected, but took a more cautious stance about further increases, hinting it could pause interest rate rises following turmoil in the banking sector.

The U.S. central bank also cut its median forecast for real GDP growth this year to 0.4% from 0.5%, suggesting the banking crisis was already having an impact on economic activity, albeit limited at the moment.

"The Federal Reserve has raised the policy rate by 25bp, but signaled it 'may' only hike once more. This is a little more dovish than anticipated, but the Fed is not expecting recent banking woes to significantly derail the economy," said analysts at ING, in a note.

"We are more cautious and fear a tightening of credit conditions raises the chances of a hard landing for the economy."

Elsewhere, GBP/USD rose 0.4% to 1.2313, near a seven-week high, ahead of the latest Bank of England's latest policy-setting meeting.

BOE Governor Andrew Bailey hinted earlier this month that the policymakers could be looking to pause its rate-hiking cycle, but the latest U.K. inflation data makes that look very unlikely.

British consumer price inflation rose to 10.4% in February from January's 10.1%, way above expectations and almost back to where it was in December.

EUR/USD rose 0.4% to 1.0901, near a seven-week high.

The European Central Bank increased interest rates by 50 basis points last week, and more hikes look likely even as the Fed hesitates over its next move.

"We need to get inflation under control, need to keep working until we have confidence that the backbone of inflation is broken," said Governing Council member Madis Müller, in an interview Thursday, adding that the bulk of the tightening had probably already been done.

USD/CHF fell 0.2% to 0.9162, with the Swiss National Bank also seen raising rates 50 bps to 1.5% later this session as it is expected to view tackling inflation as more important than any concerns over financial market turmoil.

AUD/USD traded 0.8% higher at 0.6737, USD/JPY fell 0.4% to 130.88, while USD/CNY dropped 0.8% to 6.8278, with these Asian currencies benefiting from the prospect of a less hawkish Fed.