Even though the Federal Reserve maintained its hawkish tone after hiking rates by a half percentage point, the dollar declined on Thursday as investors questioned the central bank's commitment to putting the brakes on growth in order to combat inflation.
In spite of a likely U.S. recession, Fed Chair Jerome Powell stated that the central bank will continue to raise interest rates in 2019, with rates expected to climb over 5%.
This did little to sustain the dollar's initial surge.
The pound and the euro stayed near their six-month highs against the dollar in early Asia trade on Thursday, after touching those levels in the prior session.
The pound was recently trading 0.1% down at $1.2415, after gaining 0.5% overnight, while the euro fell 0.09% to $1.0673, after also gaining 0.5% overnight.
The kiwi dipped 0.05% to $0.6456, but remained close to the six-month high of $0.6513 reached this week.
Although the dollar gained a boost in the immediate wake of the Fed's widely anticipated 50 basis point rate hike and Powell's speech, it later erased a portion of those gains when investors contemplated the deteriorating growth prospects in the world's largest economy.
The 50 basis point increase constituted a reversal from the previous four 75 basis point rate hikes.
The U.S. dollar index rose 0.02% to 103.68 against a basket of currencies, after striking a six-month low in the previous session.
Christian Hoffmann, portfolio manager and managing partner at Thornburg Investment Management in Santa Fe, New Mexico, said, "The Fed does not want financial conditions to loosen, but investors are increasingly saying, 'We hear what you're saying and we know what you want, but we don't believe you.'"
Fed funds futures also indicate that the markets anticipate U.S. interest rates will peak just below 5% in May of next year.
The assumption that inflation has likely peaked contributes to the market's skepticism that the Fed may not raise interest rates to the amount it has planned.
In November, U.S. consumer prices climbed less than anticipated for the second consecutive month, according to statistics released this week, with underlying consumer prices increasing by the least amount in 15 months.
Carol Kong, a currency analyst at Commonwealth Bank of Australia, stated, "We have our doubts that the funds rate will be maintained at such a restrictive level for so long, and I believe the market's reaction supports this view." The U.S. economy will likely weaken and decrease moderately next year, which will push the FOMC to change course later in the year.
Elsewhere, the Australian dollar was down 0.05% to $0.6860, and the US dollar down 0.06% against the Japanese yen to 135.40.
Investors will now focus on the rate decisions of the Bank of England and the European Central Bank (ECB) on Thursday, with both central banks largely anticipated to increase rates by 50 basis points.
"The Bank of England and the European Central Bank face numerous obstacles. I believe that their economies will struggle next year "said Kiwibank's chief economist, Jarrod Kerr. They must be more careful regarding their view and the weakening economies.
While New Zealand's economy saw unexpectedly robust growth in the third quarter, signals of an oncoming recession due to rising interest rates and declining property prices are beginning to emerge.