Forex
Dollar hits four-month low after Fed pivots, ECB leaves rates unchanged
© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Samuel Indyk
LONDON (Reuters) -The dollar touched a fresh four-month low on Thursday after the Federal Reserve indicated that its interest-rate hiking cycle has ended and that lower borrowing costs are coming in 2024.
On a busy day for policy announcements in Europe, the euro held gains after the European Central Bank said policy rates would be set at sufficiently restrictive levels for as long as necessary and the pound rose after the Bank of England held interest rates in a “finely balanced” decision.
Meanwhile, the Norwegian crown strengthened after a surprise rate hike and the Swiss franc was little changed after the Swiss National Bank held rates.
Fed Chair Jerome Powell said at Wednesday’s Federal Open Market Committee (FOMC) meeting that the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view”. The Fed’s projections implied 75 basis points of cuts next year, from the current level.
“The Fed was very dovish yesterday,” said Athanasios Vamvakidis, global head G10 FX strategy, BofA Global Research, who was expecting the 2024 projections to show three rate cuts.
“This was a close call and the strong consensus in any case was for a balanced tone by Powell. Instead, Powell doubled-down, with a very dovish tone.”
The , which measures the greenback against a basket of currencies, slipped as far as 102.27, its lowest since Aug. 10. It was last down 0.5% at 102.37.
Markets are now pricing a 90% chance of a rate cut in March, according to CME FedWatch tool, compared with around 65% a week earlier. Traders are pricing around a 20% chance that the Fed cuts rates next month.
CENTRAL BANKS IN EUROPE OFFER MIXED OUTLOOK
The ECB kept interest rates at a record high, as expected, and offered no clues about whether easing of policy was around the corner, even as markets have priced rate cuts from early next year.
The euro, which had already been higher against the weak dollar, held gains after the announcement. It was last up 0.4% at $1.0922 before ECB President Christine Lagarde’s press conference at 1345 GMT.
The Swiss National Bank had earlier kicked off Europe’s busy day of central bank announcements by holding rates steady at 1.75%, as expected. The franc remained weaker against the euro but a touch stronger against the softer dollar after the announcement, as the SNB acknowledged that inflationary pressure has decreased slightly over the past quarter.
The Norwegian crown meanwhile rose against both the euro and dollar after the Norges Bank unexpectedly raised rates by 25 basis points to 4.5%, adding that they would likely stay at that level for some time.
The pound rose 0.8% against the dollar to $1.2725, a two-week high, after the BoE voted 6-3 to leave interest rates at 5.25%, with policymakers Meg Greene, Jonathan Haskel and Catherine Mann preferring to have raised the bank rate by 25 basis points to 5.5%.
In contrast to the Fed, the committee said that interest rates would need to stay high for “an extended period”.
“The main message remains that rates will remain high for as long as it takes, which effectively is a push-back to market pricing early cuts,” said BofA’s Vamvakidis.
“It was broadly as markets were expecting, but looks hawkish compared with the very dovish Fed yesterday,” Vamvakidis added.
The yen continued to strengthen in the wake of the greenback’s tumble, climbing to its highest since July 31 at 140.95 per dollar. It was last up around 0.8% at 141.75 per dollar.
Expectations that the Bank of Japan (BOJ) could end negative interest rates at its monetary policy meeting on Dec. 18-19 have largely been dampened, but the BOJ could make tweaks to its statement, such as language that the bank will not hesitate to ease further if necessary, said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
That kind of change could be regarded as “one step toward normalisation… so that could be positive for the Japanese yen”, he said.
The Australian dollar, meanwhile, hit a more than four-month high at $0.6728 after domestic net employment jumped by 61,500 in November, compared to an increase of around 11,000 that markets had been forecasting.
The rose more than 1% versus the greenback to as high as $0.6249, despite data showing the New Zealand economy unexpectedly contracted in the third quarter.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“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.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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