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Dollar Falls as Markets Anticipate Peak in US Interest Rates

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Dollar Weakens as Investors Anticipate Peak in US Interest Rates

The dollar saw a decline on Thursday, with Asia-Pacific currencies experiencing gains as investors became more convinced of an impending peak in US interest rates following the Federal Reserve’s decision to maintain them. Now, attention turns to the Bank of England and whether it will deliver a similar message in today’s policy announcement.

Fed Chair Jerome Powell hinted at the possibility of another rate hike, but emphasized that the risks of doing too much or too little were now balanced, considering the funds rate target ceiling at a 22-year high of 5.5%. Investors interpreted this as a signal to maintain a sub 20% chance of a rate increase in December. As a result, ten-year Treasury yields dropped 23 basis points from Wednesday’s highs, equities rallied, and risk-sensitive currencies rebounded.

Kristoffer Lomholt, head of FX research at Danske Bank, commented on Powell’s decision, 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 currency against six major peers, was down 0.1% at 106.41 and approximately 0.8% lower than Wednesday’s high. The euro, on the other hand, saw a rise of 0.3% to $1.0598. The Swiss franc experienced a second consecutive day of gains, and the yen strengthened further away from a one-year low to 150.155 per dollar.

Despite the Bank of Japan’s recent relaxation of its yield curve control policy, the yen has struggled to gain traction. Traders have been on watch for possible intervention to support the currency after it fell to a one-year low of 151.74 per dollar and a 15-year low of 160.83 per euro following the BoJ’s announcement. Kazuo Ueda, the central bank’s governor, intends to continue dismantling its ultra-loose monetary policy next year, according to sources.

Meanwhile, sterling inched up 0.2% to $1.2173 but slipped to 87.14 per euro in anticipation of the Bank of England maintaining high interest rates. Market expectations show an almost 90% chance of rates being held at a 15-year high. However, there is no full pricing of a rate cut until September 2024, which is after cuts are expected to begin on the continent.

“Pricing is reflecting the view that BoE rates will have to remain on ‘Table Mountain’ for some months given the UK’s inflation risks,” said RaboBank FX strategist Jane Foley. She added, “On the assumption that the BoE indicates…that rates are set to remain on hold for some months, sterling is likely positioned to win back a little ground versus the euro.”

The Australian dollar, which experienced a 0.9% jump on Wednesday, continued its upward trend on Thursday, rising by another 0.6% to reach a three-week high of $0.6439. The New Zealand dollar also reached a two-week peak of $0.5896.

Bitcoin, often seen as a proxy for risk-taking, surpassed $35,000 for the first time since May 2022.

More detail via Yahoo Sports here… ( Image via Yahoo Sports )

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