By Alden Bentley
NEW YORK (Reuters) – The dollar fell and the pound rose to its highest in more than two years on Friday after Federal Reserve Chairman Jerome Powell gave an unequivocal signal that a long-awaited U.S. interest rate cut will come next month.
The dollar’s weakness also saw the euro rise to a 13-month high, while the US currency hit a 17-day low against the yen.
In his keynote address at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming, Powell said “it’s time to adjust policy,” given that upside risks to inflation have diminished and downside risks to employment have increased.
“We neither seek nor welcome further easing of labor market conditions,” Powell said. “We will do everything we can to support a strong labor market while making further progress toward price stability. With appropriate unwinding of monetary policy, there is good reason to believe that the economy will return to 2 percent inflation while maintaining a strong labor market.”
Traders on Friday continued to bet on a quarter-point rate cut at the Fed’s Sept. 17-18 meeting, with the odds at 65% after Powell’s comments. But they were pricing in about a one-in-three chance of a larger 50 basis point cut, up from just over one-in-four earlier.
The euro and yen rose, weakening the dollar index, which measures the greenback’s strength against a basket of six currencies including the yen and the dollar. The index was down 0.81 percent from late Thursday at 100.64, after being slightly firmer before Powell spoke.
“I think the market reaction, which was a little bit of a weaker dollar and a little bit of a drop in bond yields, was right,” said Steve Englander, head of G10 FX research at Standard Chartered Bank in New York. “It’s not like he said, ‘Yes, we’re going to do three rate cuts to start the easing cycle.’”
“Implicitly, this opens the door to getting to 50 basis points at some point without a timeline for that,” he said, referring to the Fed chairman’s comments on inflation and employment. “We still don’t think 50 basis points will be the first step, but it could come quickly if the labor market continues to be weak.”
Any move in September would move the Fed away from the restrictive interest rate policy it has been implementing since it began raising rates to combat inflation in March 2022, raising the federal funds target range from around zero to 5.25%-5.5%, where it has been since July 2023.
Later Friday, Chicago Fed President Austin Goolsbee said in an interview with CNBC that while he is not ready to explicitly call for the central bank to cut interest rates, monetary policy is too tight and inconsistent with current economic conditions.
“The FX market is a relative game, so expectations that the Fed will soon join other major banks in cutting interest rates are pushing the dollar lower,” said Oto Shinohara, managing director and chief investment strategist at Mesero in Chicago.
The pound rose to its highest level in more than two years against the dollar after Powell’s bearish comments on the greenback coincided with signs of strength in the British economy.
Sterling rose 0.94% in the afternoon to $1.3211. It reached $1.32295, its highest since late March 2022, after surpassing its 2023 high of $1.3144.
The move was helped by a survey showing that British consumer confidence remained at its highest level in nearly three years in August, adding to positive signs in the wider economy.
The euro ended the day up 0.75% at $1.1195, just below its afternoon high of $1.12015, a level not seen since July 20, 2023.
The USD/JPY fell to its lowest level since August 6, ending the day down 1.36% at 144.27.
The yen has been supported since Bank of Japan Governor Kazuo Ueda earlier on Friday reiterated his intention to raise interest rates if inflation remains on track to reach the bank’s 2% target sustainably.
“The comments suggest that market turmoil will not deter the Bank of Japan from considering further rate hikes in the future even if the next move is not imminent,” said Vasu Menon, managing director of investment strategy at OCBC Bank.
“As long as the dollar-yen move is orderly and gradual, this should not shake global markets as much as it did earlier this month.”
The dollar fell against the Swiss franc by 0.52% to 0.848 francs.
The USD/CAD fell 0.82% to C$1.3511.
The Australian dollar rose 1.36% to $0.6795, while the British pound rose 1.53% to $0.6229.
It rose 4.2% to $63,227.00.
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