The dollar experienced a decline on Thursday as investors increasingly believe that the peak in U.S. interest rates has been reached. This sentiment followed the Federal Reserve’s decision to keep rates on hold the previous day. Meanwhile, the pound remained steady after the Bank of England kept rates at a 15-year high and emphasized that it did not anticipate any rate cuts in the near future.
Fed Chair Jerome Powell indicated that another rate hike was possible, but with the funds rate target ceiling already at a 22-year high of 5.5%, he stated that the risks of doing too much or too little were now balanced. Market participants interpreted this as a sign to maintain their belief that there is less than a 20% chance of rate hikes occurring in December. As a result, ten-year Treasury yields decreased by 24 basis points from Wednesday’s highs, equities rallied, and risk-sensitive currencies rebounded.
Kristoffer Lomholt, head of FX research at Danske Bank, highlighted Powell’s decision not to express concern over the recent rise in short-term inflation expectations, stating, “There was a possibility of sending a much more hawkish signal but he chose not to and I think that’s what markets are reacting to.”
The dollar index, which measures the greenback against six other major currencies, dropped 0.5% to 105.94, down approximately 1% from Wednesday’s high. In contrast, the pound rose as much as 0.6% against the dollar to $1.2222, reaching its highest level in 1-1/2 weeks. The Bank of England’s decision to hold rates steady at 5.25%, ruling out rate cuts for the time being, contributed to this uptick in the pound.
Jeremy Batstone-Carr, a strategist at Raymond James, raised the question of how long this period of stability will continue, stating, “The door for future rate hikes still sits ajar, and the MPC will likely remain vigilant for further fluctuations and risks in the months ahead.”
Norway’s central bank, as widely expected, kept its benchmark rate unchanged but indicated that it would likely raise borrowing costs next month unless inflation continued to decline. Consequently, the Norwegian crown strengthened to 11.176 per dollar but weakened to 11.899 against the broadly stronger euro.
The euro saw a rise of over 0.8% against the dollar to $1.0654, while the Swiss franc increased for a second consecutive day. The yen experienced a boost, moving further away from a one-year low to 150.07 per dollar.
Despite the Bank of Japan’s relaxation of its yield curve control policy earlier in the week, the yen struggled to gain traction. Traders were cautious following its fall to a one-year low of 151.74 per dollar and a 15-year low of 160.83 per euro. There were concerns of possible intervention to support the currency. Danske Bank’s Lomholt emphasized the importance of the pace of the yen’s decline, stating, “That’s when we have seen them verbally come out and talk against the appreciation.”
Sources revealed to Reuters that Kazuo Ueda, the governor of the Bank of Japan, would continue to dismantle its ultra-loose monetary policy and aim to exit the accommodative regime that has been in place for the past decade sometime next year.
The Australian dollar, which had a 0.9% increase on Wednesday, rose a further 0.7% on Thursday, reaching a near five-week high of $0.6446. Similarly, the New Zealand dollar saw a 1% increase, hitting a two-week peak of $0.5910.
Bitcoin, often viewed as a proxy for risk-taking, surpassed $35,000 to reach its highest level since May 2022.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )