TOKYO: The US dollar was volatile on Thursday as traders evaluated the Federal Reserve’s cautious tone on further interest rate cuts. Attention also turned to the Bank of England's policy decision, with no rate change expected.
Sterling edged down 0.1% to $1.3615 after briefly reaching $1.3726 on Wednesday, its highest since early July. The euro held steady at $1.1823 after pulling back from a peak of $1.19185, the highest since June 2021.
The Fed, as expected, reduced interest rates by a quarter point on Wednesday. Chair Jerome Powell described it as a "risk-management" move in response to a weakening labor market, while downplaying urgency for more cuts. Reactions among analysts were mixed, with Goldman Sachs suggesting more cuts could follow, while ANZ said Powell's remarks were far from dovish.
The dollar index fell to 96.224 — its lowest since February 2022 — immediately after the Fed’s decision, before rebounding strongly and settling around 97.06.
Elliot Clarke of Westpac noted that the Fed’s revised forecasts reflect lingering uncertainty and inflation risks, despite signaling future rate reductions.
The Bank of England is expected to hold rates at 4%, with market focus shifting to the pace of its quantitative tightening. ING’s Francesco Pesole warned that any surprise on QT could trigger gilt sell-offs and weigh on the pound. Data on Wednesday showed UK inflation at 3.8% in August, supporting expectations that rate cuts are not imminent.
Markets continue to price in one or two more rate cuts by year-end, though persistent inflation and rising political risks are tempering expectations.
In Norway, the central bank cut rates for the second time in three months, with a signal that further easing may follow. The euro rose 0.1% against the Norwegian crown to 0.86775.
The US dollar firmed slightly to 147.215 yen ahead of Friday’s Bank of Japan decision. The BOJ is expected to hold rates steady, though markets are pricing in a potential quarter-point hike by March.
Meanwhile, New Zealand GDP data showed a 0.9% contraction in Q2, worse than expected. This added pressure on the Reserve Bank of New Zealand to ease policy, pushing the New Zealand dollar down nearly 1% to $0.5895, its lowest since September 8. — Reuters
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