Last night’s rate hike makes the dollar more attractive to investors, as it offers a higher rate of return.
This has sent the British pound sliding by 0.5%, or nearly three quarters of a cent, this morning to $1.4925 - a two-week low.
Kit Juckes, global currency expert at french bank Société Générale, says a stronger dollar may actually allow the Fed to raise rates more cautiously in 2016:
The overnight reaction to the Fed rate hike has seen equity markets rally, oil prices remain very soft, commodity currencies fall back, and the dollar rally across the board. I wanted a dollar dip to buy and so far, it’s just gone up. The focus will now be on the timing of the next Fed move, the pace thereafter, and the implications for commodity prices, capital flows out of emerging markets and China’s currency policy.If the Fed raises rates by 1% next year - in line with the path implied by the FOMC’s forecasts - the dollar will be significantly stronger by December 2016. In practise, they’ll tighten less, in part because of further dollar strength.