The Dollar Falls as Fed Chairman Powell Signals Caution on Rate Moves
Dollar Weakens After Powell’s Dovish Remarks
The dollar slipped on Friday, following two days of gains, as Federal Reserve Chair Jerome Powell expressed a cautious stance on further interest rate adjustments. He emphasized that the risk of under- or over-tightening is now more balanced, leading the market to view his comments as dovish. Investors are now pricing in expectations that the Fed is likely done raising rates.
Powell’s Views on U.S. Monetary Policy
Powell highlighted that U.S. monetary policy is slowing the economy as anticipated, with a benchmark overnight interest rate “well into restrictive territory.” However, he also noted that the Fed is prepared to tighten policy further if deemed appropriate.
Market Reaction and Rate Expectations
Following Powell’s remarks, U.S. rate futures on Friday priced in a 64% chance of a rate cut by the March meeting, compared to 43% late on Thursday. For the May meeting, U.S. rate cut chances surged to 90%, from about 76% the day before.
Impact of U.S. Manufacturing Data
Powell’s comments came after data revealed that the U.S. manufacturing sector remained weak in November, affirming his statements that Fed rate hikes have started to slow the economy. The Institute for Supply Management (ISM) reported that its manufacturing PMI was unchanged at 46.7 last month, indicating a 13th consecutive month of contraction in manufacturing.
European Central Bank Rate Cut Expectations
Softer U.S. and euro zone inflation data on Thursday reinforced expectations that central banks in both regions might be done raising interest rates, leading traders to bet on earlier cuts next year. Goldman Sachs now expects the European Central Bank to deliver its first rate cut in the second quarter of 2024, compared to a previous forecast of a cut in the third quarter.
Performance of Major Currencies
- The euro was last down 0.1% at $1.0874, benefiting from a sell-off in the dollar following Powell’s comments.
- Sterling rose 0.5% to $1.2699.
- Against the yen, the dollar dropped 0.9% to 146.855 yen.
Bitcoin Continues to Strengthen
In cryptocurrencies, bitcoin continued to strengthen, rising to an 18-month high of $38,839. It was last up 2.8% at $38,788.
Currency Bid Prices
At 3:10PM (2010 GMT), the dollar index was down 0.18% at 103.2400. The euro/dollar pair was at $1.0873, while the dollar/yen pair was at 146.8550.
Overall, Powell’s cautious remarks have led to a shift in market expectations regarding interest rate movements, impacting major currencies and other financial instruments.