US Dollar rises after Federal Reserve says it plans to cut stimulus and hints at interest rate rise

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The dollar was trading near a two-month high against Japan’s yen on Thursday, after the US Federal Reserve indicated that it was on track to start paring back its massive bond-buying programme next month.

After concluding a closely watched two-day meeting, policy makers announced that they were keeping interest rates on hold but hinted that an increase could be on the cards before the end of the year.

They also said that the Fed would reduce its holdings of around $4.2 trillion (£3.1 trillion) in US Treasury bonds and mortgage-backed securities bought after the 2008 financial crisis to bolster the economy.

“Before the Fed announced its decision, there were high expectations that monetary policymakers would drag interest rate expectations lower for 2017,” said Hussein Sayed, chief market strategist at FXTM.

“This sentiment was due to persistently low inflation and the negative impact of Hurricanes Harvey and Irma on economic growth. Instead, the US central bank decided to look past low inflation and said the harm of the Hurricanes would have no lasting economic impact,” he said.

Analysts at UniCredit agreed, saying that the dollar was rising because some market participants “may have been expecting a more cautious stance that did not materialise”.

“They responded by bidding the greenback higher as the probability of a rate hike in December has now risen,” they said.

On Thursday the dollar was trading around 0.4 per cent higher against yen, and up around 0.1 per cent against the euro and the pound, having already hit its highest level against the Japanese currency in around two months on Wednesday night.