LONDON: The US dollar rebounded across the board on Thursday as investors digested the implications of the Federal Reserve’s latest comments on the future path of interest rates while the euro slumped broadly as the region’s economic outlook darkened.
Traders interpreted the Fed’s decision to drop its commitment to guide markets on the future rate trajectory after a widely expected 75 bps hike as a sign that policymakers may soften their stance, pushing the dollar lower.
But the greenback rebounded broadly in midday London trading as traders cut some of those bets on worries that other economies, notably Europe and China, will continue to struggle in the short term, benefiting dollar-based assets.
“Problems for other currencies just keep on growing, most notably in Europe, where rising fears over gas and energy shortages are continuing to weigh on the euro and threatening the ability of the ECB to tighten policy as much as it might otherwise wish to do so,” said Stuart Cole, chief macro strategist at Equiti Capital in London.
Versus the dollar, the single currency fell 0.7% to $1.0129 while it fell more than 1.3% versus the yen.
Berenberg economists estimate the European Union might have to pay about 430 billion euros ($435.63 billion) or as much as 3% of the region’s 2021 GDP in natural gas bills. JP Morgan expects the economy to slip into a mild recession by early next year.
Dollar slightly lower after Fed hikes by 75 basis points
However, the dollar’s rise wasn’t broad-based.
The yen rose versus the greenback by nearly 1% 135.10 yen, its highest level since early July. The Japanese unit was the primary recipient of the widening interest rate differential trade between the United States and its global peers.
“Speculation is now building that the dollar may have peaked if the pace of tightening slows in September after consecutive 75bp moves in June and July,” said Kenneth Broux, an FX strategist at Societe Generale in London.
Markets have already ramped up bets of a softening in future US interest rate hikes, with futures now assigning a 65% probability of a 50 bps hike in September from 50% on Wednesday, according to CME. Bets of a 75 bps hike have been pared back to 35% from 41%.
The dollar index, which measures the greenback against six counterparts including the yen, perked 0.5% higher to 106.84 after dropping 0.59% overnight, nearly erasing most of its overnight losses.
A gauge of currency market volatility settled at its highest level since July 8 above 10%.
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