Dollar Decline: The Fed's Unexpectedly Dovish Outlook

The dollar weakened after the Federal Reserve's unexpectedly dovish outlook following a two-day policy meeting. Investors anticipated a hawkish stance but were met with reassurance of potential rate cuts, influencing currency dynamics and bond yields worldwide.

The U.S. dollar experienced a notable decline on Thursday following the Federal Reserve's less hawkish-than-expected outlook. During the two-day policy meeting, the Fed opted to reduce rates by 25 basis points. However, Federal Reserve Chair Jerome Powell's post-meeting remarks diverted from a more hawkish tone investors anticipated.

This development led to a market response where investors began to short the dollar, subsequently boosting the euro and other currencies. The euro climbed above $1.17, nearing a two-month high, while the sterling and yen also saw gains against the dollar. The dollar index fell to its lowest since October 21, settling at 98.543.

The Fed also announced plans to buy short-dated government bonds to manage market liquidity, totaling approximately $40 billion commencing December 12. This action, particularly the pace and scale, surprised investors, resulting in a rally in Treasuries and influencing bond yields inversely.

(With inputs from agencies.)