The U.S. dollar jumped higher Wednesday as the Federal Reserve signaled it could raise interest rates again this year.
The WSJ Dollar Index, which measures the U.S. currency against 16 others, rose 0.4% to 85.62. The index had been down as much as 0.4% before the Fed announcement.
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The Fed held rates unchanged but penciled in one more rate increase this year despite a recent slowdown inflation that had worried many investors. The Fed's projections for future rate increases, known as the "dot plot," showed policy makers also continue to expect three more rate increases next year.
"This clears the bar for a hawkish surprise," said Vassili Serebriakov, a currency strategist at Crédit Agricole. "Markets expected the dot plot to be more dovish."
The Fed also said it would begin unwinding in October its $4.2 trillion bond portfolio built up in the wake of the financial crisis, a decision that had been widely expected by investors.
Markets are now pricing in a 73% chance that the Fed raises rates again this year, up from 49% a week ago, according to CME Group data.
Investors went into this week's Fed meeting betting heavily against the dollar, likely exacerbating the currency's rally Wednesday as investors scrambled to cover those bearish bets.
Hedge funds and other speculative investors held a net $12.5 billion in bets against the dollar last week, near the highest level since early 2013, according to Commodity Futures Trading Commission data.
"The rate at which the dollar had fallen over the last quarter has been quite big," said Ron Waliczek, a managing director in foreign exchange and interest rates at INTL FCStone Markets. "There's going to be further dollar buying as the investment community starts looking at the Fed."
Expectations that U.S. rates would remain lower helped drive the greenback down 8% this year before Wednesday.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com
(END) Dow Jones Newswires
September 20, 2017 18:13 ET (22:13 GMT)