US Dollar holds steady following Fed rate hold

US Dollar maintains heading after Fed holds rates, Powell presser up next.
Fed political independence remains a key focus point heading into Powell press conference.

Joshua Gibson FXStreet

The US Dollar Index (DXY) jostled but overall remained in Wednesday’s trading neighborhood after the Federal Reserve (Fed) delivered its standard interest rate decision, holding interest rates steady in the 3.5-3.75% range and noting its data-dependent approach.

Market action will continue to remain limited but jittery as investors await the latest showing from Fed Chair Jerome Powell. Fed Chair Powell will be in the hotseat as investors keep an eye out for any shifts in his policy rhetoric following the Fed head’s press conference. Markets will also be anticipating questions surrounding the ongoing Department of Justice (DOJ) criminal investigation into Fed Chair Powell, brought forth by the Trump administration largely as retribution for failing to deliver interest rate cuts at a pace that satisfies the current president.

The DOJ has subpoenaed Fed Chair Powell regarding the Fed’s expenditures on a long-planned government office overhaul. The overwhelming majority of expenditures associated with the Fed office refurbishment were assigned and approved during Trump’s first term.

DXY five-minute chart

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

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