Dollar Weakens Following Fed’s Outlook
The dollar saw a decline in popularity on Thursday after the Federal Reserve presented a less aggressive forecast than many investors had anticipated. This shift encouraged traders to short the dollar, predicting additional interest rate cuts in the upcoming year.
As expected, the Fed lowered interest rates by 25 basis points at the conclusion of its two-day policy meeting. However, some were taken aback by Chairman Jerome Powell’s remarks during the press conference, which seemed to lack the hawkish tone that was expected.
“The main takeaway for us is that both the commentary and Powell’s press conference felt quite dovish,” remarked Nick Reese, head of macro research at Monex Europe.
Consequently, investors began to sell off the dollar, leading to a rise in the euro’s value. It climbed above the significant $1.17 mark during Asian trading, approaching a two-month peak of $1.1707.
Meanwhile, the pound hit a notable level of $1.3391 against the dollar, while the yen came under pressure amid a significant interest rate gap between Japan and other regions. The yen rose 0.25% to 155.64 per dollar.
The dollar index, which measures the currency against a basket of others, dropped to 98.537, marking its lowest level since October 21st.
“Many had hoped for a continuation of the hawkish sentiment we witnessed in the October FOMC meeting,” explained Tony Sycamore, a market analyst at IG. “This time, however, the tone and commentary were noticeably different, leaning toward supporting Treasury bills.”
The outcomes from Wednesday reinforced market anticipations of two additional rate cuts next year, contrasting with the Fed’s median forecast suggesting a single cut of 0.5 percentage points.
In a related development, the central bank announced plans to start purchasing short-term government bonds from December 12, aiming to manage market liquidity levels. The first round of these Treasury bill purchases is projected to reach around $40 billion.
“The early initiation and extent of these Treasury bill purchases surprised many investors,” noted analysts from Société Générale.
This has put downward pressure on U.S. yields, with the two-year government bond yield falling by about 3 basis points to 3.5340%. Similarly, the benchmark 10-year yield declined by 3 basis points to 4.1332%. Typically, bond yields decrease when prices rise.
In a separate concern, disappointing results from Oracle, a major U.S. cloud computing company, have negatively impacted its stock price. This intensifies worries regarding AI profitability and rejuvenates fears of a possible bubble in that market, thus affecting broader risk sentiment.
This downturn also placed additional strain on the Australian dollar, which fell by 0.5% to $0.6643, compounded by weak employment statistics.
Likewise, the New Zealand dollar decreased by 0.3% to $0.5799, pulling both currencies back from the multi-month highs they achieved in the previous session.
Bitcoin, often viewed as an indicator of risk appetite, dropped 3% below the $90,000 threshold, while Ether saw a nearly 5% decline, settling at $3,176.86.
Gracie Lin, CEO of OKX based in Singapore, commented, “Even with the Fed’s softer outlook, the market is still processing the overleverage from October, so the response to macro signals seems slower than usual.”
“A 25 basis point rate cut is already factored in, and short-term traders are securing profits amidst limited liquidity. Coupled with an uncertain macro and geopolitical landscape, these elements are dampening immediate market reactions,” she added.
