By Samuel Indyk
LONDON (Reuters) -The dollar dropped to a fresh four-month low on Thursday after the Federal Reserve indicated that its interest-rate hiking cycle has ended and that lower borrowing costs are coming in 2024.
On a busy day for policy announcements in Europe, the pound rose after the Bank of England held interest rates in a “finely balanced” decision, the Norwegian crown strengthened after a surprise rate hike and the Swiss franc was little changed after the Swiss National Bank held rates. The European Central Bank makes its policy announcement at 1315 GMT.
Fed Chair Jerome Powell said at Wednesday’s Federal Open Market Committee (FOMC) meeting that the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view”. The Fed’s projections implied 75 basis points of cuts next year, from the current level.
“The Fed was very dovish yesterday,” said Athanasios Vamvakidis, global head G10 FX strategy, BofA Global Research, who was expecting the 2024 projections to show three rate cuts.
“This was a close call and the strong consensus in any case was for a balanced tone by Powell. Instead, Powell doubled-down, with a very dovish tone.”
The U.S. dollar index, which measures the greenback against a basket of currencies, slipped as far as 102.27, its lowest since Aug. 10. It was last down 0.5% at 102.36.
Markets are now pricing a more than 85% chance of a rate cut in March, according to CME FedWatch tool, compared with around 65% a week earlier. Traders are pricing around a 16% chance that the Fed cuts rates next month.
CENTRAL BANKS IN EUROPE OFFER MIXED OUTLOOK
The SNB kicked off Europe’s busy day of central bank announcements by holding rates steady at 1.75%, as expected. The franc remained weaker against the euro but a touch stronger against the softer dollar after the announcement, as the central bank acknowledged that inflationary pressure has decreased slightly over the past quarter.
The Norwegian crown meanwhile rose against both the euro and dollar after the Norges Bank unexpectedly raised rates by 25 basis points to 4.5%, adding that they would likely stay at that level for some time.
The pound rose 0.7% against the dollar to $1.2714, a 10-day high, after the BoE voted 6-3 to leave interest rates at 5.25%, with policymakers Meg Greene, Jonathan Haskel and Catherine Mann preferring to raise the bank rate by 25 basis points to 5.5%.
In contrast to the Fed, the committee said that interest rates would need to stay high for “an extended period”.
“The main message remains that rates will remain high for as long as it takes, which effectively is a push-back to market pricing early cuts,” said BofA’s Vamvakidis.
“It was broadly as markets were expecting, but looks hawkish compared with the very dovish Fed yesterday,” Vamvakidis added.
The ECB was also set to hold its interest rates when it announces policy later, with markets watching for communication around possible easing of policy in 2024.
Since the last meeting, inflation has printed significantly lower than forecast, with markets questioning whether the ECB will sound more open to early policy easing.
“The probable answer is that the ECB will remain cautious and not want to provide further fuel for markets,” said Lloyds Banking Group economist Hann-Ju Ho.
The yen continued to strengthen in the wake of the greenback’s tumble, climbing to its highest since July 31 at 140.95 per dollar. It was last up around 0.8% at 141.63 per dollar.
Expectations that the Bank of Japan (BOJ) could end negative interest rates at its monetary policy meeting on Dec. 18-19 have largely been dampened, but the BOJ could make tweaks to its statement, such as language that the bank will not hesitate to ease further if necessary, said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
That kind of change could be regarded as “one step toward normalisation…so that could be positive for the Japanese yen”, he said.
The Australian dollar, meanwhile, hit a more than four-month high at $0.6728 after domestic net employment jumped by 61,500 in November, compared to an increase of around 11,000 that markets had been forecasting.
The kiwi rose more than 1% versus the greenback to as high as $0.6249, despite data showing the New Zealand economy unexpectedly contracted in the third quarter.
(Reporting by Samuel Indyk and Brigid Riley; editing by Nick Macfie, Kirsten Donovan)
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