Fed decision to keep rates close to zero sees dollar fall against euro

The dollar fell after the Federal Reserve last night held off on raising interest rates. The US central bank declined to boost its short-term interest-rate target at a policy-setting meeting, opting to delay an increase amid stubbornly low inflation, an uncertain outlook for global growth and recent financial market turmoil.

“It’s a little bit of a doveish development here and the dollar’s obviously selling off,” said Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange in Washington.

“The actual outcome was not a major surprise but I think the statement was somewhat more doveish that I was expecting.”

The dollar fell against a basket of currencies and fell 0.8% to $1.1378 per euro in New York trade immediately after the Fed announcement.

In holding their benchmark federal funds rate at zero to 0.25%, policy makers showed they are still not convinced inflation will move gradually back to their 2% target, despite continued gains in the US labour market. US unemployment in August fell to 5.1%, its lowest level since April 2008.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Federal Open Market Committee said in a statement.

“Markets are somewhat disappointed by the lack of certainty and the lack of direction,” said Karl Schamotta, director of foreign-exchange research and strategy in Toronto at Cambridge Global Payments, which hedges currencies for firms.

“Markets are really settling in for a long period of uncertainty here and a long conflict between opposing forces in the American economy.”

The central bank has held borrowing costs near zero for almost seven years to bolster the economy after the 2008 financial crisis and its aftermath.

Speculation that Fed policy makers would raise rates, in contrast to easing by the ECB and Bank of Japan, propelled the US currency to a 12-year high against the euro in March.