Dollar slides as Fed dents hawks, markets eye two more rate cuts

SINGAPORE: The dollar fell on Thursday after the Federal Reserve delivered an outlook that was not as hawkish as some had anticipated, giving investors confidence to short the currency as they bet on two more rate cuts next year.

The Fed at the conclusion of its two-day policy meeting lowered rates by 25 basis points as expected, but remarks from Chair Jerome Powell at his post-meeting press conference surprised some who had been positioned for a more hawkish tone.

“For us, the big takeaway was a dovish tilt to the accompanying commentary, and at Fed Chair Powell’s press conference,” said Nick Rees, head of macro research at Monex Europe.

As a result, investors sold the dollar, which in turn pushed the euro above the key $1.17 level and close to a two-month high of $1.1705 in early Asia trade on Thursday.

Sterling touched a 1-1/2-month peak of $1.3391, while the yen , which has recently come under pressure from still-wide interest rate differentials between Japan and the rest of the world, rose 0.25% to 155.64 per dollar.

Against a basket of currencies, the dollar fell to its lowest since October 21 at 98.543.

“I think most were looking for a rerun of the same hawkish sentiment which we saw in that October FOMC meeting. But this has certainly a different tone about it, the commentary’s different, the T-bill buying supportive, the vote certainly wasn’t as hawkish as everybody expected,” said Tony Sycamore, a market analyst at IG.

“This is, for me, the green light for risk assets to rally into year-end.”

Wednesday’s outcome reinforced market expectations for two more rate cuts next year, against the Fed’s median expectation for a single quarter-percentage-point cut next year.

The central bank also announced that it would start buying short-dated government bonds to help manage market liquidity levels beginning December 12, with the initial round totalling around $40 billion in Treasury bills.

That kept bonds supported, with the two-year U.S. Treasury yield falling about 3 bps to 3.5340%. The benchmark 10-year yield was similarly down 3 bps to 4.1332%. Bond yields move inversely to prices.

“The earlier start and size of the T-bill purchases surprised investors, leading (to) a meaningful rally led in Treasuries by the front-end,” said analysts at Societe Generale in a note.

In other currencies, the Australian dollar retreated from a roughly three-month top hit in the previous session and was down 0.14% to $0.66665.

The New Zealand dollar eased 0.07% to $0.5812.