USD index selling in the wake of FOMC may be overdone

May 4 (Reuters) – The USD index fell to 101.05 Thursday after the US Federal Reserve hiked rates by 25 basis points as expected, with a hint at a possible pause in the statement, but the selling looks overdone.

Focus is now on the 100.78 year-to-date low. Failure to break below it would risk a bounce back towards the 102 handle.

The selloff in the index is overdone, and should be regarded as more of an indication of concern over the turmoil in US regional banks after PacWest Bancorp said it is considering a sale of strategic assets.

Traders may soon re-focus on the key takeaway from Fed chair Jerome Powell’s speech: that the Fed has not made a firm decision on whether it will stop raising rates. This should not be ignored.

Though there are potential negatives for the US economy ranging from tightening credit conditions to bank failures, consumption remains strong, while the labor market is still tight–as Powell highlighted. Unless core inflation eases, the chance of another rate hike or two remains on the cards. The Fed remains strongly committed to bringing inflation back down to 2%.

St Louis Fed President James Bullard, a noted hawk, speaks Friday – he might reiterate the need to hike rates further until inflation is tamed.

(Catherine Tan is a Reuters market analyst. The views expressed are his own. Editing by Ewen Chew and Sonali Desai)