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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.

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.

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.

Most Gulf central banks cut their key interest rates on Wednesday after the Federal Reserve decreased US rates by half a percentage point, citing 'greater confidence' on inflation.

The Central Bank of the UAE (CBUAE) has decided to cut the Base Rate applicable to the Overnight Deposit Facility (ODF) by 50 basis points, from 5.40 to 4.90 percent, effective from 19th September.

This decision was taken following the US Federal Reserve’s announcement today to reduce the Interest Rate on Reserve Balances (IORB) by 50 basis points.

The CBUAE decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities.

The Base Rate, which is anchored to the US Federal Reserve’s IORB, signals the general stance of monetary policy and provides an effective floor for overnight money market interest rates in the UAE.

Saudi Arabia, the region's biggest economy, cut its repurchase agreement (Repo) rate and reverse repo rate by 50 bps each to 5.5% and 5.0% respectively, according to a central bank statement.

Qatar's central bank cut three key rates by 55 bps each, while Bahrain cut the overnight deposit rate by 50 bps. Kuwait reduced its discount rate by a quarter percentage point to 4% from 4.25%.

"A Fed rate cut signals a favourable environment for the Gulf’s long-term investment and economic diversification objectives," said Damian Hitchen, CEO of Saxo Bank for the Middle East and North Africa.

"With lower borrowing costs, investments in non-oil sectors, such as tourism, renewable energy, and technology, become more attractive, aligning with the region’s strategic goals to reduce reliance on oil," he added.

Agencies/WAM