The dollar suffered from prolonged overnight losses on Thursday after the Federal Reserve Chairman Jerome Powell said that the US interest rates were just below neutral, a remark that has been considered by investors as a clue that the series of interest rate hikes was nearing its end.
Powell’s dovish remarks took the currency market by surprise as he remarked that the policy rate, at 2 to 2.25 percent, is now “just below” the broad range of estimates of neutral, which in September was 2.5 to 3.5 percent.
This view represents a huge departure from the comments in October when he said that rates were a “long way from neutral at this point.”
The Fed chairman’s remarks led to the dollar slumping across the board, especially versus riskier currencies like the Australian and New Zealand dollars, which both rallied during the previous session.
Some emerging market currencies like the South African rand and the Turkish lira also rallied 1 percent each.
“Powell’s comments were read as too hawkish back in October…to some extent this overnight comments have neutralized that,” said Rodrigo Catril, who is a senior currency strategist at NAB. “The question now is just how more dovish markets can get in terms of rate hike expectations…investors are now pricing in a December rate hike and only one more rate hike in 2019.”
Traders expect more clues on the Fed’s monetary tightening path from the minutes of the US Central bank’s November 7 to 8 meeting, due out later in the day.
The US dollar index, which is a gauge of the greenback’s value versus six other major peers, traded firmly at 96.84 in early Asian trade. The index shed 0.54 percent on Wednesday, its sharpest percentage decrease since the start of the month.
Some analysts think that a pause in rate hikes had become necessary.
“US economic data has been weakening, stocks have been falling and lower oil and gas prices restrict rather than encourage inflation. As a result, consistent rate hikes are no longer necessary,” said Kathy Lien, who is the managing director of FX strategy at BK Asset Management. “In many ways Powell is stating the obvious by saying what the market is starting to feel already.”
Traders may be careful of building aggressive short positions, given the G20 summit on Friday and Saturday where US President Donald Trump and China’s President Xi Jinping are set to discuss their trade differences.
Catril said that safe-haven buying could return to the greenback if there were no signs of a truce between Washington and Beijing over the course of the G20 summit.
Trump said this week that it was “highly unlikely” he would agree to China’s request to postpone the planned increase in tariffs for further talks.
The dollar slipped 0.15 percent versus the yen to trade at 113.52, though analysts expect interest rate differentials between the US and Japan to support the dollar/yen.
The euro traded at $1.1368 on Thursday. The single currency gained 0.7 percent in the previous session because of anti-dollar flows.
Sterling traded a shade lower at $1.2821, as investors expect the pound to remain under pressure with traders betting that Prime Minister Theresa May will fail to win approval for her Brexit deal from a divided parliament.
The Bank of England cautioned on Wednesday that Britain risks a bigger hit to its economy than it suffered from the global financial crisis a decade ago if it leaves the European Union in a “disorderly” manner, which would include a 25 percent crash the pound’s value.