© Reuters. FILE PHOTO: A banker counts currency at a bank in Westminster, Colorado on November 3, 2009. (Reuters)/Rick Wilking/File Photo
Written by Ray Wei and Samuel Indyk
LONDON (Reuters) – The pound fell to a two-month low on Tuesday after Federal Reserve officials signaled the central bank was nearing the end of its tightening cycle, while the pound hit a 15-month high after wage growth beat expectations.
Several Fed officials said Monday that the central bank will probably need to raise interest rates further to bring down inflation, but that the end of the current monetary policy tightening cycle is nearing.
The comments pushed the dollar to a two-month low of 101.67 against a basket of currencies, as traders scaled back their expectations about how high US interest rates might go.
US interest rate expectations have been a major driver of the dollar since the Fed began its tightening cycle last year.
“Broader pressure is likely to develop on the US dollar as cyclical headwinds mount and markets begin to anticipate easier Fed policy settings,” said Sean Osborne, Scotiabank’s chief foreign exchange strategist.
Markets are now focusing their attention on US consumer price data due on Wednesday, which will provide more clarity on the progress the Fed has made in its battle against stubbornly high inflation.
A survey from the Federal Reserve Bank of New York on Monday showed waning near-term inflation expectations among Americans, who said last month they expected the weakest near-term inflation gains in just over two years.
“The market may receive an additional reason to sell the dollar in the form of inflation data,” said Yona Park Heger, foreign exchange analyst at Commerzbank, noting that headline and core inflation are likely to ease.
Meanwhile, it reached a 15-month high of $1.2913 after British wage growth hit a record high, adding pressure on the Bank of England to tighten policy further to control inflation.
The pound has been rising on the back of a stronger economy and a strong repricing of expectations for a tighter Bank of England policy, according to Danske Bank FX analyst Kerstin Cundby-Nielsen.
“There are no signs of relief in the labor market data and the markets continue to push prices up. This was a huge factor in driving the pound,” said Condby Nielsen.
This was among the biggest gainers, rising around 0.6% and crossing 141 for the dollar for the first time in nearly a month. It was last traded at 140.455.
The yen rose more than 3% from a seven-month low last month, when it weakened past the closely watched 145 level for the dollar, which put traders on high alert for possible intervention by Japanese authorities.
“(The yen) started to falter earlier, near 145, because there were concerns about intervention in the currency markets,” said Moh Seong Sim, currency analyst at Bank of Singapore.
He said rising Japanese government bond yields, along with a weaker dollar, also contributed to the yen’s rise.
“The market is starting to wake up again to the idea that there are (BoJ) policy risks at the July meeting… Due to the rising backdrop of inflation in Japan, the market is starting to become more cautious of what policy adjustment could come.”
Elsewhere, the euro rose 0.1% to $1.1012, and settled at $0.6680, while the euro fell 0.2% to $0.6198.
The rate rose, last trading at 7.2055 per dollar, with sentiment supported by the expansion of fiscal policy support from China’s central bank to the country’s beleaguered real estate sector.