Dollar Pauses Six-Day Rally After Fed Hike; Sterling Slips as BoE Holds Rates

The U.S. dollar's six-day winning streak came to a halt on Thursday, stabilizing after the Federal Reserve implemented a widely anticipated interest rate increase. The move shifted investor focus to divergent monetary policies in other major economies, with the British pound weakening after the Bank of England held rates steady and the yen firming ahead of a potential policy shift in Japan.

Fed Delivers Hawkish Rate Hike

The Federal Open Market Committee (FOMC) on Wednesday unanimously voted to raise the federal funds rate by a quarter-point to a new target range of 3.75% to 4.00%. The U.S. Dollar Index (DXY), which measures the greenback against a basket of six peers, was little changed at 100.23, as the hike was largely priced in by markets following a nearly 1.5% climb over the prior six sessions.

Policymakers signaled a continued hawkish stance, with the Fed's updated economic projections showing at least 12 officials anticipate one more rate hike this year. In his press conference, Fed Chair Kevin Warsh reinforced this outlook, stating that "inflation is too high and has been for too long." According to the CME FedWatch Tool, traders are currently pricing in a 55% probability of another quarter-point hike at the October meeting.

Sterling Slips as BoE Stands Pat

In London, the British pound fell 0.2% against the dollar to $1.3356 after the Bank of England’s Monetary Policy Committee (MPC) voted to hold its key interest rate at 3.75%. While the decision was expected, the vote was not unanimous, with three of the nine MPC members dissenting in favor of a 25-basis-point increase. The committee acknowledged that inflation risks were "tilted more to the upside" than in July.

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The pound's decline was attributed to a less aggressive tone than some market participants had anticipated. "The BoE’s policy update proved less hawkish than some investors had feared, triggering a pullback in both GBP and gilt yields," analysts at MUFG wrote in a note cited by Investing.com.

Yen Strengthens Ahead of Anticipated BoJ Shift

The Japanese yen gained ground, with the USD/JPY pair declining 0.2% to 155.98, as currency markets positioned for a landmark policy decision from the Bank of Japan (BoJ). The central bank is widely expected to deliver a 25 basis point rate hike at its upcoming meeting, a significant step away from its long-standing ultra-loose monetary policy.

This potential tightening in Japan creates a notable tension in global currency markets. "A hawkish Fed and a tightening BoJ are pulling in opposite directions on USD/JPY," said Jeffrey Roach, chief economist at LPL Financial. He added that a faster BoJ tightening cycle could push global bond yields higher as Japanese investors repatriate capital.