IGI Logo

The dollar was on the back foot on Thursday after the Federal Reserve delivered what some expected to be its last rate hike, while market focus shifted across the Atlantic to the European Central Bank's (ECB) rate decision later in the day.

The Fed on Wednesday raised interest rates by a quarter of a percentage point, as expected, marking the central bank's 11th rate increase in its last 12 meetings.

While Fed Chair Jerome Powell left the door open to another hike in September, traders were unconvinced, sending the U.S. dollar broadly lower.

The dollar index was last 0.04% lower at 101.06, away from a two-week top of 101.65 hit earlier in the week, though its losses were muted as money markets had already priced in Wednesday's 25-basis-point increase.

Sterling steadied at $1.2935, having eked out a slight gain against the dollar in the previous session.

"Another hike over the coming months is possible but we would also not rule out (Wednesday's) meeting marking the end of the hiking cycle," said Emin Hajiyev, senior economist at Insight Investment.

"(The) U.S. is closer to the end of the hiking cycle than its peers. A dovish pivot from the Fed will likely exert a downward pressure on the U.S. dollar in the medium term."

The ECB comes under the spotlight next, with investors expecting the central bank to similarly raise rates by 25 bps at the conclusion of its monetary policy meeting later on Thursday, with focus on its forward guidance.

Ahead of the rate decision, the euro firmed at $1.1083.

"The ECB looks all but certain to hike the deposit rate by 25 bps... This should not surprise market as it has been largely telegraphed," said Nadia Gharbi, senior economist at Pictet Wealth Management.

"The real debate is whether the ECB will hike again in September (and beyond)."

Elsewhere, the Japanese yen remained under pressure and fell more than 0.1% to 140.43 per dollar ahead of the Bank of Japan's monetary policy decision on Friday, where it is seen maintaining its ultra-loose policy stance.

BOJ Governor Kazuo Ueda was quoted as saying at a key government meeting on Wednesday that the central bank will maintain accommodative monetary conditions for companies.

The kiwi rose 0.27% to $0.6226, while the Australian dollar gained 0.14% to $0.6769.

The Aussie had tumbled nearly 0.5% in the previous session, after a lower-than-expected inflation reading lessened the pressure for another rate hike by the Reserve Bank of Australia.

The offshore yuan edged slightly higher to 7.1433 per dollar, though was searching for direction as markets were left feeling mixed after China's leadership pledged at a key Communist Party meeting this week to support the economy, but offered very little detail on specific measures.

"The (world's) second-largest economy is underperforming," said Jarrod Kerr, chief economist at Kiwibank. "China's in a position where they probably need a little bit more stimulus to keep things going."