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The dollar came off its lows but remained weaker overall on Wednesday after the Federal Reserve's guidance on its tightening cycle was less dovish than expected, even though it forecast fewer interest rate hikes than it had in September.
The Fed raised interest rates, as expected, while citing the impact of ongoing market volatility and potential slowdowns around the world. The greenback earlier hit a seven-week low against the yen and a roughly one-week trough versus the euro before paring losses after the Fed's decision.
In its policy statement, the Fed said the U.S. economy has been growing at a strong rate and the job market has continued to improve. It noted that "some" further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs.
Fresh economic forecasts released by the Fed on Wednesday showed policymakers expect two rate hikes next year and one the following year.
"We've still got the commitment to 'further gradual increases' ahead now prefaced by 'some' which many thought would be dropped altogether," said Brian Coulton, chief economist, at Fitch Ratings in London. "Given the stock market declines and negative international economic news recognized in the statement this still points to quite a bit of confidence at the Fed in the ability of the U.S. economy to withstand a few more rate hikes," Coulton said. "The downgrade to their 2019 growth forecast is pretty modest."
The Fed sees U.S. economic growth slowing to 2.3 percent in 2019 from 3.0 percent this year, and inflation coming in below target at 1.19 percent next year. Juan Perez, senior currency trader at Tempus Consulting in Washington, said he still sees the dollar as resilient because Wednesday's rate hike "does represent a higher return for investors."
"We predict the dollar will swing as it closes the year, but will be on a downward trend if indeed the Fed admits more caution and monitoring of lagging indicators is needed before further tightening," he added.
U.S. President Donald Trump has berated the Fed repeatedly over its continued rate rises, and on Tuesday said in a tweet it was "incredible" for the central bank to even consider tightening given global economic uncertainties. The safe-haven yen and the Swiss franc both strengthened as Tuesday's plunge in oil prices provided a stark reminder of dimming prospects for the global economy.
U.S. crude futures recovered on Wednesday, but have been in a downtrend since October. Risk sentiment has been soured by weaker-than-expected economic data out of China and the euro zone. The euro was supported by news that Italy had struck a deal with the European Commission over its contested 2019 budget, signaling an end to weeks of wrangling that had shaken financial markets.
The dollar index, which measures the greenback against six major currencies, was 0.2 percent lower at 96.940.