Dollar drops the most in nearly 2 months, gold jumps as Fed raises concerns about trade policy

Key Points
  • The dollar fell 0.8 percent, in its worse decline in nearly two months, as trade war fears increased and the Fed increased the outlook for rate hikes.
  • Gold rallied as the dollar wobbled, with futures gaining 1.6 percent.
US Dollar weakness is a 'bit perplexing'

The U.S. dollar had its biggest one-day decline in nearly two months on Wednesday amid concerns the U.S. could ignite a trade war with China and on doubts about the Fed's outlook.

As of 4:24 p.m. in New York, the dollar index traded 0.77 percent lower at 89.67 against a basket of currencies, its biggest decline since Jan. 24. It fell nearly 1 percent that day.

As the dollar fell, gold jumped. Gold futures for April rose 1.6 percent to $1,333 per ounce.

The Fed raised interest rates by a quarter point, as expected, and also increased its forecast for more interest rates next year and the following year. For the longer term, it said its long run rate would be 2.9 percent, up from 2.75 percent.

"It seemed like a hawkish hike," said Andres Jaime, emerging markets strategist at Morgan Stanley. "But I think when you listened to [Fed Chair Jerome] Powell he was sort of hesitating about that hawkish view. I think when you put the statement together with his Q and A, it was less hawkish."

The Fed did raise its economic forecasts, but Jaime said it was unclear whether the Fed really can reach that higher long run rate, which is where the Fed would stop raising interest rates.

The dollar lost more ground as Powell briefed journalists, and he did speak about the trade concerns in response to a question. He said Fed officials have been hearing from corporate officials who are worried about the Trump administration's trade actions.

"There was no thought that the change in trade policy should have any impact on the current outlook," Powell said.

On Thursday, the Trump administration is expected to announce tariffs on Chinese goods. It has already put tariffs on steel and aluminum imports, which are also aimed at China.

The Mexican peso and Canadian dollar gained against the greenback on optimism that the North American Free Trade Agreement will be extended.

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