The Federal Reserve's policy statement knocked 1 percent off the value of the dollar on Wednesday without even directly mentioning it.

The statement and updated economic forecasts Fed officials published after their meeting sent a clear message to markets: The greenback's 24 percent surge since the end of June has complicated the Fed's plans to tighten by holding down already too-low inflation and clouding the outlook for economic growth. 

"It was powerful," said Laura Rosner, a U.S. economist at BNP Paribas SA in New York. "We are learning how they respond and react to an exchange-rate shock."

Here's where investors read between the lines.

1. Policy makers expect to raise their benchmark interest rate more slowly than they had previously thought 

The median estimate now pegs the federal funds rate at 0.625 percent at the end of this year, down from the 1.125 percent median in December. At the end of 2016, the median forecast sees the funds rate at 1.875 percent, down from 2.5 percent. And at the end of 2017, it's 3.125 percent instead of 3.625 percent.

2. The committee mentioned exports for the first time since March 2009

David Fuller's view

We can be certain that the Dollar Index’s rally is now well within the Fed’s firing range.  This belief led me to include this paragraph in my lead article response yesterday:

Has the Fed surreptitiously sold USD this week to weaken the currency?  That would have been a smart move, in my opinion, because a rate hike and an even stronger Dollar could have been too much for the slowly and erratically recovering US economy.  Moreover, this was not a buy-the-rumour, sell-the-news situation since the first rate hike is several months away. 

However, if Janet Yellen was only attempting to jawbone the Dollar lower, she will almost certainly have to issue further comments.  She might actually have to intervene, most likely on a surreptitious basis which would be less controversial, if the Dollar were to strengthen further. 

The Fed wants to raise US interest rates, gradually, as the beginning of monetary policy normalisation.  It wants to do so this year and possibly early next year, so that its monetary policy could then be on hold well before next year’s General Election on 8^th November. 

However, Janet Yellen knows that it would be very risky to raise US interest rates if that action triggered another self-feeding momentum advance in the greenback any time soon.  It has already risen too rapidly at 25% on the Dollar Index since last July, hitting corporate profits for multinational companies and slowing the US economic recovery in the process.

I think the Dollar will rise further over the longer term, given the USA’s economic advantages of a strong lead in many technologies and virtual energy independence.  However, an appreciating Dollar Index from current levels needs to occur within the context of a stronger global economy, to avoid additional weakening of the USA’s recovery.  The most likely medium-term outlook, I maintain, is for a lengthy consolidation of Dollar gains already seen.