The U.S. dollar rose slightly on Thursday, recovering from its lowest level in more than a year after the Federal Reserve announced a large interest rate cut, while sterling rose ahead of the Bank of England’s latest policy meeting.
At 04:25 ET (08:25 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 100.410, after falling to a more than 12-month low in the previous session.
Big Fed rate cut confirmed
The European Central Bank began its latest rate-cutting cycle on Wednesday, cutting interest rates for the first time since March 2020 by 50 basis points to a range of 4.75% to 5%.
Federal Reserve Chairman Jerome Powell said the risks between higher inflation and further labor market weakness are now balanced, and the central bank is likely to cut interest rates further amid growing confidence in low inflation.
But Powell also said the bank has no intention of returning to the ultra-low interest rate regime it used during the pandemic, and that the Fed’s neutral interest rate will now be much higher than we have seen in the past.
“Where does the Fed’s decision leave the dollar?” ING analysts wonder in a note. “In our view, the dollar remains in a softer position than most of its developed market peers. Powell has tried to temper the dovishness of an overly aggressive rate cut, but it will be hard to resist the perception that it was the market pricing in dovishness that pushed the Fed over the line with a 50bp move. If the Fed is seen as unwilling to let down market expectations, investors may continue to favor erring on the dovish side.”
All eyes now turn to the weekly data for the latest evidence on the health of the important labor market.
Sterling in demand ahead of BoE meeting
In Europe, the US dollar rose 0.3% to 1.3253, after rising to 1.3298 in the previous session, its strongest level since March 2022.
The central bank meets later in the session and is expected to keep its key interest rate at 5%, after starting to ease monetary policy with a 25 basis point cut in August.
“The inflation picture has not improved enough to justify further easing yet,” ING said.
UK inflation rose by 2.2% year-on-year last month, close to the central bank’s medium-term target, but services inflation is accelerating to 5.6% a year.
The pound (dollar) rose 0.3% to 1.1149, not far from a three-week high hit in the previous session.
Interest rates were cut for the second time this year last week, but there is a degree of uncertainty about when the next move will be.
Inflation in the euro zone is still not as low as the European Central Bank would like, so interest rates need to remain high enough to resolve price pressures, Bundesbank President Joachim Nagel said on Wednesday.
While inflation fell to 2.2% in August and may fall even closer to the ECB’s 2% target this month, it is likely to rise again by the end of the year and could end 2024 at around 2.5%.
Yen falls ahead of BOJ meeting
The Australian dollar index rose 0.3% to 142.75 as traders also took a stance that there would be no changes to domestic interest rates after Friday’s meeting.
The central bank is widely expected to keep interest rates unchanged, but it could still signal a rate hike in the future based on elevated inflation expectations.
The Japanese session is also scheduled for Friday.
The pound fell 0.2% to 7.0698, ahead of the People’s Bank of China’s decision on Friday. The central bank is expected to leave the key rate unchanged.