USD drops as Federal Reserve cuts interest rates by 0.5%

The dollar dropped after the Federal Reserve on Wednesday cut interest rates by half a percentage point, citing greater confidence that inflation will continue to recede to the US central bank's 2% annual target.

The Fed cut the overnight rate to the 4.75%-5.00% range and policymakers see the Fed's benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75%-3.00% range.

The dollar index was last down 0.53% on the day at 100.37, the lowest since July 2023. The euro gained 0.55% to $1.117575. The greenback weakened 1.07% to 140.825 Japanese yen .

"It's a more dovish cut. It certainly wasn't a hawkish cut," said Vassili Serebriakov, FX & macro strategist at UBS in New York.

"The way we thought about it before the announcement is that you know a 50-basis point cut is dollar negative. If they had cut by 25 bps, there were different scenarios where the dollar could perform. But a 50-basis point cut is unambiguously dollar negative."

Following the Fed's rate move, futures on the fed funds rate, which measures the cost of unsecured overnight loans between banks, have priced in about 72 basis points of more rate cuts this year.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, hit its steepest level since July 2022 following the Fed's cut. It was last at 7 basis points.

Sterling , the best performing G10 currency of the year, rose 0.84% at $1.32730. The yuan strengthened against the dollar at 7.0761 per dollar in offshore trading.

"The market was pretty much 50-50 going into the decision. So it surprises obviously half the market," said Brad Bechtel, global head of FX at Jefferies in New York. "And clearly the Fed is trying to get out in front of the slowdown in the US economy and provide support. But so far, the reaction in the market isn't overly crazy."