The dollar rose on Thursday after falling the previous day as central banks continued to roil currency markets, while sterling fell to a four-week low after the Bank of England cut interest rates from a 16-year high.
The dollar index, which tracks the greenback against six other currencies, rose 0.35% to 104.40. The index fell 0.4% on Wednesday after the Federal Reserve held interest rates steady but opened the door to cutting borrowing costs in September.
Geopolitical tensions and a slowing global economy are likely to support the dollar, a traditional “safe haven” for investors in times of stress, even as the Federal Reserve moves to cut interest rates, said Chris Turner, head of global markets at ING.
“The geopolitical environment and overall economic growth elsewhere in the world are not really good,” he said. “We clearly still have some real tensions in the Middle East, and manufacturing seems to be in recession in large parts of Europe and Asia.”
Hamas leader Ismail Haniyeh was assassinated in Tehran on Wednesday, an attack that has sparked threats of retaliation against Israel and raised fears of a wider war in the Middle East.
The pound fell to $1.2752 after the Bank of England cut interest rates, its lowest since early July. It was last down 0.51 percent at $1.279, slightly above its level before the decision, which markets had priced in around a 60 percent chance of a rate cut.
Bank of England Governor Andrew Bailey, who led the 5-4 decision to cut interest rates by a quarter of a percentage point to 5%, said the Bank of England’s Monetary Policy Committee would move cautiously in the future.
“If you look at the headlines that Bailey has been making: ‘Beware of cutting too fast or too big,’ that to me means they’re looking at some kind of steady quarterly pace of cuts,” said Colin Asher, an economist at Mizuho.
“The process of reducing interest rates has begun, but it is reasonably gradual.”
Sterling has fallen from a one-year high above $1.30 in mid-July as investors’ views on interest rate cuts by the Bank of England shift.
The euro touched a three-week low of $1.0777 and was last down 0.36%.
Bank of Japan’s Monetary Policy Easing Trend
The Japanese yen fell, with the dollar rising 0.4% to 150.525 yen.
The yen jumped about 1.8% the day before after the Bank of Japan raised interest rates for the second time this year. It rose 7.3% in July, its strongest monthly performance since November 2022, after starting the month rooted near 38-year lows.
The Japanese authorities’ intervention to bolster the currency has led to a rise in the currency, along with a narrowing interest rate gap between the United States and Japan, which has stimulated the liquidation of profitable carry trades, as traders borrow yen at low interest rates to invest in dollar-denominated assets for higher returns.
Federal Reserve Chairman Jerome Powell reiterated on Wednesday that the central bank is also focused on maintaining a healthy labor market, adding fresh weight to Friday’s U.S. jobs report for July.
The report is expected to show that employers added 175,000 jobs during the month, slightly below the 206,000 added in June. Weekly jobless claims data is due later Thursday.
Traders now expect 72 basis points of monetary policy easing this year. Charu Chanana, head of currency strategy at Saxo, said the Fed meeting “reinforced market expectations that larger rate cuts remain likely, and will be heavily influenced by how the economy progresses from here.”