The dollar slipped as traders focused on the Fed’s rate cut, and risk sentiment improved
The US dollar weakened against a basket of other currencies on Wednesday after comments from Federal Reserve Chair Jerome Powell reinforced speculation of a series of interest rate cuts in coming months, while a broader improvement in risk sentiment weakened the greenback.
Francesco Pesole, foreign exchange strategist at ING said improved risk sentiment on Tuesday and overnight weighed on the dollar, which benefited from the upside.
“Earnings were pretty good (on Tuesday) and the S&P opened low, but the whole day actually had a pretty good session. I think the dollar got a decent flow from the worsening risk sentiment so the improvement seems to have weakened it,” Pesole said.
He also said growing optimism in European markets about France’s political situation was helping the euro.
The euro strengthened 0.17% to $1.16265 after rising 0.3% in the previous session, supported by the French government’s proposal to delay key pension reforms.
The dollar index, which measures the US currency against six other major currencies, fell 0.2% to 98.843 at 1104 GMT, extending a 0.2% decline from the previous session.
Meanwhile, the yen and Australian dollar were the standout performers as both continued to recover from sharp falls against the greenback last week.
Some analysts also pointed to the impact of Beijing’s decision to set the official yuan peg on the stronger side of the closely watched 7.1 per dollar line for the first time since last November.
The risk-sensitive Aussie strengthened despite the tariff dispute between Beijing and Washington. The yen strengthened even as uncertainty deepened over who will be Japan’s next prime minister, with local media reporting that a parliamentary vote scheduled for next Tuesday may be delayed amid political wrangling.
Sterling rose 0.33% to $1.3363, bouncing back from a drop on Tuesday, when official data showed a fall in wage growth.
British Chancellor of the Exchequer Rachel Reeves said she was considering tax increases and spending cuts for her budget on November 26, confirming widespread expectations given her pledge to balance the country’s finances.
Shares shone in Europe on Wednesday, with a string of positive earnings from big names lifting the STOXX 600 by 0.7%.
“Profits – whether in Europe or in the US – if they are good, tend to reduce the value of the dollar,” Pesole said.
FED LEAVES DOOR OPEN ON CUT
Also weighing on the dollar was the dovish tone delivered by Fed Chair Powell, who in his speech on Tuesday left the door open to a rate cut by saying the U.S. labor market was still mired in a downward spiral in terms of hiring and labor shortages. He said the absence of official economic data due to the government shutdown did not prevent policymakers from assessing the economic outlook, at least for now.
Markets are currently pricing in a quarter-point rate cut at the Fed’s Oct. 28-29 meeting and another at its next meeting in December, followed by three more rate cuts next year, according to LSEG data.
“At this point, the market is pretty much trading ‘Goldilocks’,” said DBS analysts, with risk assets supported by a strong economy as well as loose monetary conditions.
“Trade tensions, government shutdowns and inflation concerns… are all put aside for now.”
US Trade Representative Jamieson Greer helped calm tensions on Tuesday when he told CNBC that there were still plans for President Donald Trump to meet with Chinese leader Xi Jinping.
The dollar fell 0.3% to 151.37 yen
The Aussie rose 0.5% to $0.652, after falling 0.5% a day earlier, when it hit its lowest level since Aug. 22 at $0.64405.
However, the New Zealand dollar only edged up 0.2% to $0.5729, after slumping to a six-month low of $0.56839 on Tuesday. Reserve Bank of New Zealand Chief Economist Paul
Conway told Bloomberg TV on Wednesday that policymakers were open to further rate cuts if needed, following last week’s massive cuts.
Source: Reuters (Reporting by Kevin Buckland in Tokyo and Lucy Raitano in London; Editing by Shri Navaratnam and Toby Chopra)
