The dollar fell broadly on Thursday, with risk-sensitive Asian currencies leading the gains, as investors cheered a likely peak in U.S. interest rates after the Federal Reserve kept them on hold.
The focus now turns to the Bank of England, and the British pound crawled 0.3% higher to $1.2180 and firmed to 86.98 per euro on expectations that rates will be held at elevated levels.
Fed Chairman Jerome Powell left the door open to another hike, but with the benchmark interest rate at a 22-year high of 5.5%, he said the risks of doing too much or too little were now balanced.
Markets took that as a green light to stick with a sub-20% chance of a December rate hike. Ten-year Treasury yields are down 20 basis points from Wednesday’s highs, equities have rallied and risk-sensitive currencies have rallied.
The Australian dollar rose 0.9% on Wednesday and another 0.7% on Thursday to a three-week high of $0.6439. The New Zealand dollar hit a two-week high of $0.5896.
Bitcoin, which is sometimes traded as a proxy for risk-taking, broke above $35,000 for the first time since May 2022.
“If you go back to the last FOMC meeting, we were talking about more rate hikes, and now it’s much more balanced and much more cautious,” said IG Markets analyst Tony Sycamore.
“That’s supported equity markets and I think it’s supported the pointy end of the risk spectrum, which is where bitcoin is.”
Traders also drew further conviction that U.S. interest rates may have peaked after data showed U.S. manufacturing contracted sharply in October, though separate data pointed to a still resilient labor market that is likely to see the Fed keep rates at restrictive levels for longer.
The euro was up 0.2% at $1.0597, the Swiss franc rose for a second straight day and the yen was helped off a one-year low at 150.45.
The yen has struggled to gain traction even as the Bank of Japan eased its yield curve control policy further on Tuesday, with the gap to much higher U.S. interest rates seen as too wide to turn the exchange rate around.
The yen has fallen more than 20% against the dollar in two years.
“At the end of the day, the broad underperformance of the yen over the past two years can only be reversed if one simple thing happens: the Bank of Japan starts to raise rates, and far more than a tiny move to zero,” said George Saravelos, head of FX research at Deutsche Bank.
“When and if that happens, rather than FX intervention, is pretty much the only thing that matters.”
Markets are pricing in a nearly 90 percent chance that the Bank of England will keep rates at a 15-year high later on Thursday, but haven’t fully priced in a rate cut until September 2024 – well after cuts on the Continent are expected to have begun.
“Pricing reflects the view that BoE rates will have to remain on ‘Table Mountain’ for some months given the UK’s inflation risks,” said RaboBank FX strategist Jane Foley.
“On the assumption that the BoE … indicates that rates will remain on hold for a few months, sterling is likely to regain some ground against the euro.”
