Dollar under pressure after Fed’s Powell says US rates near neutral

SINGAPORE: The dollar weakened against its peers on Thursday after Federal Reserve Chairman Jerome Powell said US interest rates were just below neutral, taken by many investors as a tip that the rate hike cycle was nearing its end.

Powell’s dovish remarks took the currency markets by surprise as he noted that the policy rate, at 2-2.25 per cent, is now “just below” the broad range of estimates of neutral, which in September was 2.5-3.5 per cent.

This view represents a significant departure from comments in October, when Powell said rates were a “long way from neutral at this point”.

The Fed chairman’s remarks led to the dollar weakening across the board, especially versus riskier currencies such as the Australian and New Zealand dollars.

They both gained 1.2 per cent after Powell’s remarks. Later, the Aussie advanced slightly more while the kiwi weakened.

“Powell’s comments were read as too hawkish back in October… to some extent his overnight comments have neutralised that,” said Rodrigo Catril, senior currency strategist at NAB.

“The question now is just how much more dovish markets can get in terms of rate hike expectations,” he said, adding that investors “are now pricing in a December rate hike and only one more rate hike in 2019.”

However, some analysts cautioned against reading Powell’s comments as overly dovish.

“The market may have misinterpreted the message and focused on just this line that rates are ‘just below the broad range of estimates… that would be neutral’,” said Eugene Leow, rates strategist at DBS, in a note.

Leow noted that Powell’s comments were factual given that the range of estimates given in the dot plot is between 2.50-3.50 per cent and the Fed funds rate upper bound is at 2.25 per cent currently.

Traders expect more clues on the Fed’s monetary tightening path from the minutes of the US central bank’s Nov. 7-8 meeting, due out later on Thursday.

The dollar index, a gauge of its value versus six major peers, traded marginally lower at 96.76 in Asian trade. The index lost 0.54 per cent on Wednesday, its steepest per centage decline since Nov. 1.

Traders may be cautious of building aggressive short positions, given the G20 summit on Friday and Saturday where US President Donald Trump and China’s President Xi Jinping are scheduled to discuss contentious trade matters.

NAB’s Catril noted that safe-haven buying could return to the greenback if there were no signs of a truce between Washington and Beijing over the course of the G20 summit.

Early this week, Trump said it was “highly unlikely” he would agree to China’s request to hold off a planned Jan. 1 increase in tariffs for further talks.

At 0436 GMT Thursday, the dollar was down 0.4 per cent versus the yen to trade at 113.25. But analysts expect interest rate differentials between the US and Japan to support the dollar/yen in the next couple months.

The euro changed hands at $1.1377, gaining 0.1 per cent on Thursday. The single currency gained 0.7 per cent in the previous session thanks to dollar weakness.

Sterling traded marginally higher at $1.2843. Investors expect the pound to remain under pressure as traders bet that British Prime Minister Theresa May will fail to win approval for her Brexit deal from a fractious parliament.

The Bank of England warned on Wednesday that Britain risks a bigger hit to its economy than it suffered from the global financial crisis a decade ago if it leaves the European Union in a “disorderly” manner, which would include a 25 per cent crash in the value of the pound. (Reporting by Vatsal Srivastava; Editing by Eric Meijer and Richard Borsuk)

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