By Kevin Buckland
TOKYO (Reuters) – The dollar remained lower on Wednesday after falling against its major peers overnight as a strong U.S. producer price reading bolstered bets the Federal Reserve will cut interest rates this year.
The New Zealand dollar fell sharply from a four-week high after the Reserve Bank of New Zealand cut its key interest rate and signaled more cuts were ahead, surprising some market participants.
The yen rose against the dollar, supported by a decline in US bond yields, while crucial US consumer price index figures loom later on Wednesday.
Japanese Prime Minister Fumio Kishida’s decision not to run for re-election in his party’s leadership race next month had little impact on markets, analysts said.
Meanwhile, risk-sensitive currencies such as the pound and the Australian dollar held firm after an unexpected fall in U.S. inflation supported stocks. The pound briefly hit a more than three-week high, while the euro traded near a more than two-week high after its best day against the dollar since late April.
The pound, which measures the currency against six major rivals including the pound, the euro and the yen, was steady at 102.61 by 0315 GMT, after falling 0.49% overnight.
Traders were already confident that the Federal Open Market Committee would cut interest rates at its September meeting ahead of the producer price data, but they raised their bets on a large 50 basis point cut to 53.5% from 50% the day before, according to CME’s FedWatch tool.
CBA analysts expect the dollar to remain in a holding pattern ahead of the US CPI data, but see risks skewed towards further weakness after that.
“We expect the market to double down on large FOMC rate cuts this year if core CPI rises 0.1% m/m or less, (while) we expect the market to largely undervalue core CPI if it rises 0.2% m/m or 0.3% m/m,” Commonwealth Bank of Australia currency strategist Carol Kong wrote in a note to clients.
Kiwi falls after interest rate cut
The New Zealand dollar fell as much as 1.08% after the Reserve Bank of New Zealand cut interest rates by a quarter percentage point, with only about half of economists and more than two-thirds of traders betting on such a move. That reversed earlier gains that took it to its highest since July 18 at $0.6084. It was last down 1.02% at $0.6015.
It was the central bank’s first easing of monetary policy since early 2020, and came a year ahead of its own expectations.
“The RBNZ has completed a 180-degree U-turn, cutting interest rates to provide much-needed relief to households and businesses just three months after raising the possibility of additional rate hikes,” said Tony Sycamore, market analyst at IG.
The Australian dollar fell 0.23% to $0.66185 in sympathy with the New Zealand dollar, after earlier rising to $0.66395 for the first time since July 23.
The pound steadied at $1.2862 after rising 0.76% on Tuesday when it got an extra boost from data showing a surprise fall in the UK unemployment rate.
The euro was steady at $1.0991 after rising to $1.099975 on Tuesday for the first time since Aug. 5.
The dollar fell 0.31% against the yen to 146.40 yen, down slightly at 3.85% in Asian trading, after falling 5.5 basis points overnight.
In Japan, Kishida announced he would step down in September, ending a three-year term marred by political scandals and paving the way for a new prime minister to lead Japan’s ongoing economic recovery.
“The impact on the economy and financial markets may be relatively limited because Mr. Kishida’s policies, if you try to describe them, are really broad in scope and not focused on specific topics,” said Masayuki Kishikawa, chief macro strategist at Sumitomo Mitsui Asset Management.
“The big question now is who will be next on the list, and that will be more important.”