Investing.com – The US dollar slipped slightly Thursday, but remained near two-year highs after the Federal Reserve signalled a slower pace of rate cuts in 2025, while sterling bounced ahead of the latest Bank of England policy meeting.

At 05:05 ET (10:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 107.670, after climbing to an over two-year high on Wednesday.

Dollar slips from two-year high

The dollar surged on Wednesday after the slashed its outlook for interest rate cuts in the coming year, after delivering its expected rate cut. 

The US central bank policymakers now only sees an additional 50 basis points of easing in 2025, instead of the 100 bps indicated in the previous forecasts in September. 

“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING, in a note.

“Markets are fully expecting a hold in January and 11bp are priced in for March. If indeed the dot plot works as a benchmark for rate expectations for the next three months, the bar for a data surprise to seriously threaten the dollar’s big rate advantage is set higher.”

The economic data slate centers around the third-quarter release, which is expected to show that annualized growth fell to 2.8% in the quarter, a drop from 3.0% the previous quarter. 

Sterling bounces ahead of BOE meeting

In Europe, traded 0.7% higher to 1.2662, bouncing from Wednesday’s three-week low ahead of the Bank of England’s policy-setting meeting later in the session.

The is widely expected to hold rates unchanged, continuing its cautious approach to easing monetary policy as inflationary concerns remain.

“The focus will be on any tweaks to forward-looking language and the vote split (which we expect at 8-1 hold-cut). There is no press conference scheduled for this meeting,” ING said.

“Our perception is that the BoE will try to make this announcement a non-event, offering cautious signals for further easing down the road but still highlighting stickiness in services inflation and wages.”

rose 0.6% higher to 1.0415, bouncing after its hefty 1.3% drop in the previous session.

The lowered its key rate last week for the fourth time this year, and is likely to cut interest rates further in 2025 if inflation worries fade.

“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” ECB President Christine Lagarde said in a speech earlier this week.

Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.

Yen slumps after BOJ kept rates unchanged

In Asia, soared 1.5% to 157.13, jumping over 155 for the first time since late November, after the kept rates steady and flagged a cautious outlook for 2025. 

The BOJ’s decision disappointed some traders holding out for a December hike. The central bank had raised rates twice this year in a historic pivot away from ultra-loose policy.

rose 0.3% to 7.3078, with the pair climbing to its highest level since September 2023. The yuan was pressured by the prospect of looser monetary conditions in China, as the government flagged more stimulus measures to boost growth.

By Harry Robertson, Rae Wee and Vidya Ranganathan

LONDON/SINGAPORE (Reuters) -The dollar slipped on Thursday, a day after surging to a two-year peak after the Federal Reserve rocked markets by signalling a much slower pace of rate cuts in 2025, while the yen slid after the Bank of Japan (BOJ) stood pat on rates.

Currencies around the world tumbled on Wednesday after the Fed decision boosted the dollar, although many rebounded on Thursday in choppy trading conditions with thin volumes ahead of the holiday period.

The BOJ kept interest rates steady as expected, but the yen fell sharply as Governor Kazuo Ueda gave little away in a post-meeting press conference.

The dollar rose 1.4% against the yen to 157.16, its highest since July.

Investors had been looking out for hints of imminent BOJ tightening, particularly after the Federal Reserve struck a hawkish tone at its meeting a day earlier.

But the governor reiterated that policymakers would need more time to assess incoming economic data and the implications of U.S. President-elect Donald Trump’s policies.

“I think the market was anticipating that the furthest they would go today would be a hawkish hold,” Jane Foley, head of FX strategy at Rabobank, said.

“But some of the comments Ueda has made could perhaps be interpreted as not being very hawkish. For example that he’s waiting to see data on the momentum of wages in the spring wage talks.”

In the broader market, the fallout from the Fed continued to ripple across markets after traders heavily dialled back on easing expectations next year.

The was last down 0.25% after jumping more than 1% on Wednesday to a peak of 108.25.

The euro, which tumbled 1.34% on Wednesday, managed to claw back some losses and was last 0.5% higher at $1.0403.

Foley at Rabobank said the euro was naturally rebounding and volatility was higher due to low holiday trading volumes.

The Bank of England held interest rates at 4.75% as expected on Thursday but the pound fell after three policymakers voted for a cut, surprising investors who had expected only one official to opt for a reduction.

Sterling dipped after the announcement and was last up 0.2% at $1.2598 , having climbed as much as 0.7% earlier in the day after shedding 1.1% in the previous session.

The dollar’s rally sent its peers including the Canadian dollar and the South Korean won tumbling, although many currencies found a footing against the greenback on Thursday.

“We think (the) decision marks the start of an extended pause from the FOMC, even if it is a little too early to say this explicitly,” Nick Rees, senior FX market analyst at Monex Europe, said.

“An upward adjustment in market expectations should support dollar upside over the coming months.”

The Canadian dollar sank to its lowest in more than four years at 1.4466 per U.S. dollar. The won tumbled to its weakest level in 15 years.

Fed Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation, sending global stocks plunging and bond yields spiking.

Policymakers estimated they would be likely to lower borrowing costs by just 50 basis points next year, 50 basis points less than they envisaged in September.

China’s finished the domestic session at 7.2992 per dollar, the weakest close since November 2023.

Australia’s dollar bottomed at $0.6199, a two-year low, but was last up around 0.5%.

The dropped to a two-year low before also ticking up. Data on Thursday showed that New Zealand’s economy sank into recession in the third quarter.

The Swedish and Norwegian crowns both rebounded against the dollar on Thursday, after Sweden cut rates but Norway held them steady.