The dollar fell on Wednesday after the US Federal Reserve moved to a hawkish monetary policy but without the harsher surprises that may have added to the momentum for weeks.

The dollar index, which has gained 3% since the start of the Russo-Ukrainian war on February 24 and 10% since May, fell as much as 0.6% on Wednesday as traders elaborated on the Fed's statement after a two-day meeting.

No additional hawkish surprises, said Erik Bregar at Silver Gold Bull Inc, adding that traders were expecting too much from the Fed. That explains why some of these hawkish bets were slightly reduced.

The euro and pound were both up 0.7%, with the euro at $1.1032. The Fed is expected to raise interest rates by a quarter of a percentage point and projects its policy rate will reach a range of 1.75% to 2% by the end of this year and 2.8% next year.

The dollar's decline was surprising and could reflect that the Fed's rhetoric was no more hawkish. The Fed is projecting an equivalent quarter-percentage point rate hike at each of its remaining six policy meetings this year, in line with market expectations for interest rates.

Several USD Currency Pairs Experienced a Slight Increase

The 10-year US Treasury yield hit 2.2% and the two-year yield rose to 1%, flattening the yield curve. The Bank of England meets on Thursday and markets expect to raise rates by another quarter point.

The Bank of Japan is expected on Friday to abandon its very loose policy setting. The dollar was up 0.4% on the Japanese yen and at noon touched 119.13 yen, its highest in more than five years.

The commodity-sensitive Australian dollar was up 1.3% at $0.7288. The dollar was lower Tuesday morning in Asia, along with the Japanese yen and Australian dollar.

The latest COVID-19 outbreak in China led to lockdowns in several cities, but the focus is on the US Federal Reserve's March policy decisions. The US Dollar Index, which tracks the greenback against a basket of other currencies, edged down 0.08% to 98.948.

The USD/JPY pair edged up 0.11% to 118.31, with the Bank of Japan (BOJ) lowering its policy on Friday. The GBP/USD pair edged up 0.20% to 1.3026, with the Bank of England set to cut policy on Thursday.

The AUD/USD pair edged down 0.08% to 0.7181. The Reserve bank of Australia released the minutes from its last meeting earlier in the day, and the NZD/USD pair edged down 0.01% to 0.6744.

The Fed's Expectations Against Dollar Movement in Pandemic Times

The USD/CNY pair edged up 0.16% to 6.3754. Chinese data released earlier in the day showed that fixed asset investment grew 12.2% year-on-year in February. Industrial production grew 7.5% year-on-year and retail sales grew 6.7% year-on-year, while rates were 5.5%.

The Fed is widely expected to raise interest rates for the first time in the pandemic when it drops policy on Wednesday. Investors expect a 25-basis point gain at this meeting, according to CME's Fedwatch tool.

There are thoughts the Fed's statement and Chairman Jerome Powell's press conference after the meeting will have an effect in terms of market prices for a 50-basis point rise in May and beyond, and that will have an impact on the intraday US dollar.

The dollar is not far from 99,415 hit in the last week, its highest level since May 2020. The yen posted sharp declines in the last session, as the divergence in the policies adopted by the Fed and the BOJ became more visible.

Hopes that Ukraine and Russia will reach negotiations to start a war sparked by Russia's invasion on February 24 also take away some of the safe-haven yen. Fourth talks meet on Monday, but no new progress has been reported. Talks will resume on Tuesday.