The dollar sank broadly against its rivals on Thursday and is on track for its biggest two-day drop in a year after the US central bank signalled it was ready to cut interest rates as early as next month. The sharp fall in the dollar took currency markets by surprise and forced some hedge funds that had built up large long dollar bets before the rate decision to dump the greenback.
The Fed joined global peers such as the European Central Bank and the Australia's central bank this week in signalling that more policy stimulus is needed to boost growth. That fuelled a rally in relatively higher-yielding currencies such as the Australian dollar and the Korean won. "It seems to us as if the 'dovish' Fed and Trump/Xi trade optimism narratives are both being rolled into a single ball of USD negativity," said Stephen Gallo, European head of FX strategy at BMO Capital Markets.
The dollar fell 0.5% against a basket of its rivals to 96.64, putting it on course to posting its biggest two-day losing streak since February 2018.
It also retreated by 0.5% to a six-month low against the Japanese yen at 107.47.
"With global central banks engaged in a battle to weaken their currencies, there is a rush to high-quality currencies with higher interest rates," said Neil Mellor, a senior currency strategist at BNY Mellon in London.
The greenback came under additional pressure after benchmark 10-year Treasury yields slid to their lowest level in more than two years.
The overnight drop in global bond yields has boosted rate cut bets across global markets with money markets pricing in three rate cuts from the Fed before the end of the year and as many as five cuts until mid 2020.
But some market participants believe the Fed may kick-start its rate cutting cycle by aggressive steps compared to expectations of more gradual easing over the coming months.
"What we thought was particularly aggressive yesterday is that Powell said they hadn't decided on the size of the cuts," said Peter Chatwell, head of rates at Mizuho in London.
"The uncertainty of whether the first move will be 25 basis points or 50 basis points will be a valid part of market pricing."
The widespread dollar weakness boosted appetite for risk-oriented currencies, with the euro barrelling past the $1.13 line to its one-week high while the Australian dollar and the New Zealand dollar gained half a percent each.
China's yuan rallied to its strongest level in five weeks amid signs that Beijing and Washington are returning to the negotiating table in their trade dispute. Bucking the global trend of dovish central banks, Norway's central bank raised interest rates and predicted more rate hikes in the coming months, sending the currency soaring against the euro and the dollar.
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