Dollar hits four-month low after Fed pivots, ECB leaves rates unchanged

LONDON: The dollar touched a fresh four-month low on Thursday after the Federal Reserve indicated that its interest-rate hiking cycle has ended and that lower borrowing costs are coming in 2024.

On a busy day for policy announcements in Europe, the euro held gains after the European Central Bank said policy rates would be set at sufficiently restrictive levels for as long as necessary and the pound rose after the Bank of England held interest rates in a “finely balanced” decision. Meanwhile, the Norwegian crown strengthened after a surprise rate hike and the Swiss franc was little changed after the Swiss National Bank held rates.

Fed Chair Jerome Powell said at Wednesday’s Federal Open Market Committee (FOMC) meeting that the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view”. The Fed’s projections implied 75 basis points of cuts next year, from the current level.

“The Fed was very dovish yesterday,” said Athanasios Vamvakidis, global head G10 FX strategy, BofA Global Research, who was expecting the 2024 projections to show three rate cuts. “This was a close call and the strong consensus in any case was for a balanced tone by Powell. Instead, Powell doubled-down, with a very dovish tone.”

The US dollar index, which measures the greenback against a basket of currencies, slipped as far as 102.27, its lowest since Aug. 10. It was last down 0.5% at 102.37. Markets are now pricing a 90% chance of a rate cut in March, according to CME FedWatch tool, compared with around 65% a week earlier. Traders are pricing around a 20% chance that the Fed cuts rates next month.

The ECB kept interest rates at a record high, as expected, and offered no clues about whether easing of policy was around the corner, even as markets have priced rate cuts from early next year. The euro, which had already been higher against the weak dollar, held gains after the announcement. It was last up 0.4% at $1.0922 before ECB President Christine Lagarde’s press conference at 1345 GMT.

The Swiss National Bank had earlier kicked off Europe’s busy day of central bank announcements by holding rates steady at 1.75%, as expected.

The franc remained weaker against the euro but a touch stronger against the softer dollar after the announcement, as the SNB acknowledged that inflationary pressure has decreased slightly over the past quarter.

The Norwegian crown meanwhile rose against both the euro and dollar after the Norges Bank unexpectedly raised rates by 25 basis points to 4.5%, adding that they would likely stay at that level for some time.

The pound rose 0.8% against the dollar to $1.2725, a two-week high, after the BoE voted 6-3 to leave interest rates at 5.25%, with policymakers Meg Greene, Jonathan Haskel and Catherine Mann preferring to have raised the bank rate by 25 basis points to 5.5%.