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Monday, June 5, 2023

Dollar fights back after Fed drives it down

LONDON: The dollar clawed back much of the ground it had lost 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 Fed removed a reference to being “patient” on rate rises from the statement it issued after its policy meeting. 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 unravelled as traders bought back the dollar. The euro was down 2 percent at $ 1.0631, having traded as high as $ 1.0920 overnight.

“You had an overshoot last night, so you’ve just moved back now to what would be a more sensible reaction to what was said … but it doesn’t feel like the mood has particularly changed,” said Daragh Maher, an FX strategist at HSBC in London.

“What we saw last night … was a reminder that a stronger dollar is effectively a tightening on monetary conditions in the US, so it does some of the work for the Fed. And if it’s doing some of the work for the Fed, the Fed can be a little bit slower in raising rates.”

Central bank meetings in Switzerland and Norway will take centre stage later in the session. The Swiss are expected to keep policy on hold while Norway is expected to cut rates again.

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.

Against the yen, the greenback slid as low as 119.29 overnight, its lowest since Feb. 27, trading below 120.00 for the first time in nearly three weeks. It recovered some ground to 120.69 yen, up about 0.5 percent on the day.

“People are still cautiously buying dollar/yen,” Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm. “I’m convinced that even after this selloff, the dollar has a solid base against the yen because people are buying on dips.”

Copyright Reuters, 2015

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