Dollar dips to two-year low as Fed holds interest rates steady

U.S. dollar banknotes.
Liu Jie | Xinhua via Getty

The U.S. dollar fell to a two-year low on Wednesday after he Federal Reserve left its interest rates unchanged at near zero.

Expectations that the Fed will let inflation run higher than previously expected before raising interest rates has helped send real yields to near-historic lows and is also raising some fears that the dollar's role as a reserve currency could shrink.

"Forex markets will be laser-focused on whether there is a signal that it will tolerate higher inflation, as this could weigh on real yields, and thereby the dollar, further," analysts at Action Economics said in a report.

Real 10-year Treasury yields, which reflect returns after expected inflation, have fallen to negative 0.93%.

The dollar has also been held down by a continued rise in coronavirus cases in the United States, even as other parts of the world, including Europe, appear to have contained outbreaks.

"The dollar's outlook remains weak thanks to the diverging trends in coronavirus cases between Europe and the U.S.," said Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank.

U.S. deaths from the novel coronavirus were approaching 150,000 on Wednesday, the highest level in the world and rising by 10,000 in 11 days, according to a Reuters tally.

Against a basket of other currencies the dollar fell 0.26% to 93.51, after earlier dipping to 93.39, its lowest level since June 2018. It has weakened more than 3% since the last Fed meeting as yields on benchmark U.S. Treasury debt have fallen more than 20 basis points since then.

The weakening dollar pushed the Australian dollar higher, with the currency trading at $0.7180, hitting a 15-month peak after data showed Australia's consumer prices fell by a record in the second quarter.

The euro traded at $1.1772, up 0.5%, although it has stepped back from Monday's 22-month high of $1.17815. The dollar traded at 104.99 yen, after earlier falling to a four-month low of 104.81 yen.

Sterling gained 0.33% to $1.2975 the highest since March.