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Dollar higher as Fed skips rate hike but stiffens hawkish stance

Illustration shows U.S. dollar banknotes

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The U.S. dollar edged higher against a basket of currencies on Wednesday, after the Federal Reserve held interest rates steady but stiffened its hawkish stance with a further rate increase projected by the end of the year.

As they did in June, Fed policymakers at the median still see the central bank's benchmark overnight interest rate peaking this year in the 5.50%-5.75% range, just a quarter of a percentage point above the current range.

But from there, the Fed's updated quarterly projections show rates falling only half a percentage point in 2024 compared with the full percentage point of cuts anticipated at the meeting in June.

"This wasn't a 'pause,' it was a 'skip,'" said Karl Schamotta, chief market strategist at Corpay in Toronto.

"With the economy performing better than expected and inflation pressures remaining persistent, Fed officials chose to maintain a hawkishly data-contingent bias in this afternoon's statement and dot plot," Schamotta said.

The U.S. dollar index, which measures the currency against a basket of rivals, was 0.09% higher at 105.21, after having been as low as 104.66 earlier in the session.

The index rose for its ninth straight week last week, its longest winning streak in nearly a decade as resilient U.S. growth has fueled a rebound in the dollar.

Fed Chair Jerome Powell said that while some things are out of the central bank's control, there is a good chance the Fed's aggressive rate hikes will not send the economy into a downturn.

Interest rate sensitive two-year Treasury yields hit 17-year highs on Wednesday after the Fed decision.

"It looks as though the Fed is trying to send as hawkish a signal as it possibly can," said Gennadiny Goldberg, interest rate strategist at TD Securities.

The dollar index's recent rally has put it on track to form a golden cross - a bullish technical trading chart pattern - affirming an upbeat near-term view on the currency, according to a BofA Global Research note.

The pound was volatile, last down 0.28% to $1.2357. It fell to a near four-month earlier in the session following data showing British annual consumer price inflation (CPI)unexpectedly fell to 6.7% in August, a day before the Bank of England is expected to raise rates again.

Economists polled by Reuters had forecast CPI would rise to 7.0% from July's 6.8%.

Dominic Bunning, Head of European FX Research at HSBC, said softness in core and services inflation in particular should give some comfort and limit the BoE to a 25 basis point hike on Thursday, marking the peak in the cycle.

Attention stayed fixed on the yen as U.S. and Japanese authorities heaped on fresh comments about the possibility of intervention.

The yen was down 0.13% versus the greenback at 148.05 per dollar after the Fed decision.

Japan's top financial diplomat, Masato Kanda, reiterated warnings that Japanese authorities are always in close communication on currencies with U.S. and overseas policymakers while keeping a close watch on market moves with a "high sense of urgency."

Asked whether Washington would show understanding over another yen-buying intervention by Japan, U.S. Treasury Secretary Janet Yellen said overnight it "depends on the details" of the situation.

In cryptocurrencies, bitcoin was down about 1% on the day at $26,931, but close to a near three-week high touched in the previous session.

(Reporting by Saqib Iqbal Ahmed; additional reporting by Herbert lash in New York, Joice Alves in London and Brigid Riley in Tokyo; Editing by Marguerita Choy and Jonathan Oatis)