The dollar tumbled against the euro and other leading currencies on Thursday as investors treated a tweaking of the tone of the Federal Reserve’s statement as a sign that the central bank could pause its steady series of rate rises.
The tone of the latest statement wrong-footed currency traders, sending the euro up more than a cent in just a few minutes.
The Fed raised interest rates, as expected, by a quarter-point to 5.25 per cent but signalled that any further rate rises were less of a certainty than many had thought, although it did caution that “some inflation risks remain”.
As US trading wound down after an eventful afternoon, the euro was at $1.264, off a peak of $1.2667 but still up sharply from $1.252 before the news. The dollar slid from Y116.2 to just over Y115.
“Traders probably sense from the statement that the Fed is proceeding cautiously, even reluctantly, in terms of future tightening,” said Alan Ruskin, strategist at RBS Greenwich Capital. “It seems like it may have caught the market off guard, and certainly caught those expecting an overtly more hawkish statement off guard.”
David Sloan, economist at 4Cast, said the statement cast doubt on the likelihood of a further quarter-point move at the Fed’s August 8 meeting. “We feel that the chances of such a move have now shifted a little below 50 per cent,” he added. “The call remains finely balanced, and could shift as fresh data come in.”
For other currencies the market vigil ahead of the Fed’s decision meant events that might have moved the market – such as expectation-beating eurozone money supply growth data – were largely ignored. Money supply growth in May was 8.9 per cent year-on-year, matching the record pace set in April 2003.
Lena Komileva, G7 market economist at Tullet Prebon, said the data would reinforce the European Central Bank’s fears that its current stance on monetary policy was too accommodative.
“The data provide justification for a more aggressive ECB stance,” she said. “This increases the chances of a 25 basis point move next week, or more likely, a 50bp adjustment at the next meeting in August.”
Elsewhere, the pressure on Toshihiko Fukui, Bank of Japan governor, continued over his investment with a fund manager now charged with insider trading.
Kozo Yamamoto, head of the ruling Liberal Democratic party’s monetary policy panel, became the first senior politician from the party to call for Mr Fukui’s exit. Traders have speculated that Mr Fukui’s departure might prompt the postponement of an expected interest rate rise from the BoJ next month.
Derek Halpenny, senior economist at Bank of Tokyo-Mitsubishi UFJ, said Mr Yamamoto had long been “anti-BoJ” and his call was unlikely to hold much sway with more senior members of the Japanese government.
“Whatever the outcome, a July rate hike followed by a long pause is still the likeliest course of monetary policy in Japan,” said Mr Halpenny. “That realisation could well be the catalyst for the next lurch upwards in the dollar against the yen.”
Sterling had fallen to a two-month low against the dollar before the greenback’s slide reversed the move. The pound had dropped to $1.8091 following comments from Mervyn King, governor of the Bank of England, which added to the mood created by soft June house price data.
Dealers said Mr King’s testimony to the UK’s Treasury Select Committee, in which he highlighted the deflationary effects of the recent drop in equities and the “surprisingly” limited effects of soaring energy costs on the economy, had reduced the chances of a rate rise.
But the dollar’s slide boosted sterling to $1.826.
Get alerts on Front page when a new story is published