Thursday, 19 March 2015 20:31
LONDON: The dollar fought back across the board on Thursday after posting its biggest daily fall in 18 months in the wake of a much more cautious Federal Reserve statement on interest rates than expected.
The Norwegian crown gained as much as 3 percent against the euro – its biggest daily rise since 2008 – after Norway’s central bank kept interest rates on hold, defying widespread expectations of a cut.
In the statement the Fed issued after its policy meeting on Wednesday, the U.S. central bank removed its previous reference to being “patient” on rate rises. But it also downgraded its views on the economy and inflation and lowered its interest rate trajectory.
That signalled a far more gradual path to policy normalisation than many investors had foreseen and drove the dollar down around 1.8 percent against a basket of currencies on Wednesday night. The euro rose around 2.5 percent against the greenback – its biggest gains in six years.
But in early European trading, most of those gains unraveled as traders bought back the dollar.
“Today, what people are perhaps considering is that you’ve still got a case where on a relative basis, the U.S. is still an outperformer,” said Hamish Pepper, FX strategist at Barclays bank in London, which pushed its forecast for when the Fed would start raising rates from June to September after the statement.
Having traded as high as $ 1.10625 on Wednesday night, the euro was around 3 cents lower than that at $ 1.07085, while the dollar index was up around 1 percent at 98.668.
Fed Chair Janet Yellen, who like most central bankers tends to avoid discussing currencies, told reporters the strong dollar is compressing inflation “at least on a transitory basis”, which suggests a tacit admission that the soaring dollar had stalled the central bank’s policy-tightening plan.
“What we saw last night … was a reminder that a stronger dollar is effectively a tightening on monetary conditions in the U.S., so it does some of the work for the Fed,” said Daragh Maher, an FX strategist at HSBC in London.
Switzerland’s central bank also left rates unchanged on Thursday, driving up the Swiss franc around 0.2 percent against the euro to 1.06115 franc.
The Norwegian crown soared to a one-week high of 8.6460 crowns per euro after the Norges Bank’s shock decision on rates.
“It was extremely surprising,” said Barclays’ Pepper. “You had a situation where both the market and the median consensus forecasts were agreeing that they would cut rates by 25 basis points, so … you’ve seen the currency move in response.”
Copyright Reuters, 2015