NEW YORK: The dollar fell on Friday, after two days of gains, as Federal Reserve Chair struck a cautious tone on further interest rate moves, suggesting the US central bank is likely done with its tightening cycle.
He said it was clear that US monetary policy was slowing the economy as expected, with a benchmark overnight interest rate “well into restrictive territory.” Powell noted, however, that the Fed is prepared to tighten policy further if deemed appropriate.
“Markets view today’s comments as inching toward the dovish camp,” said Jeffery J. Roach, chief economist at LPL Financial, by email. A few weeks ago, Powell said policy is restrictive but today, he believes policy is ‘well into restrictive territory.’ I think it’s fair for markets to latch on to that subtlety.”
The US dollar index - which tracks the currency against six major counterparts - was last down 0.2% at 103.24 after ending November on Thursday with its weakest monthly performance in a year.
Following Powell’s remarks, US rate futures on Friday priced in a 62% chance of a rate cut by the March meeting next year, compared to 43% late on Thursday, according to the CME’s FedWatch tool. For the May meeting, US rate cut chances surged to nearly 90%, from about 76% the day before.
Powell’s remarks came after data showed the US manufacturing sector remained weak in November, affirming his statement that the Fed rate hikes have started to slow the economy.
The Institute for Supply Management (ISM) said its manufacturing PMI was unchanged at 46.7 last month. It was the 13th consecutive month that the PMI stayed below 50, which indicates contraction in manufacturing.
Softer US and euro zone inflation data on Thursday reinforced expectations that central banks in both regions might be done raising interest rates in their battle against price rises, leading traders to bet on earlier cuts next year.
Goldman Sachs on Friday said it now expected the European Central Bank to deliver its first rate cut in the second quarter of 2024, compared to a previous forecast of a cut in the third quarter.
Currency movements were a little more subdued on Friday, after month-end trades on Thursday contributed to bigger swings, analysts said.
Mixed economic data across Europe failed to set the tone for the euro, with a survey showing a downturn in euro zone manufacturing activity eased slightly last month but remained deeply in the red. Britain also reported contraction in manufacturing, but an improved reading for a third straight month.
The euro was last down 0.1% at $1.0882, cutting losses and benefiting from a sell-off in the dollar following Powell’s comments.
Sterling rose 0.5% to $1.266.
Against the yen, the dollar dropped 0.9% to 146.90 yen. The yen was on course for its third straight week of gains, pulling it away from the near 33-year low of 151.92 per dollar touched in the middle of November.
Rising expectations of the Bank of Japan abandoning its ultra-easy monetary policy next year along with a drop in US yields have buoyed the Asian currency in the past few weeks.
In cryptocurrencies, bitcoin continued to strengthen, rising to a fresh 18-month high of $38,839. It was last up 2.8% at $38,765.