Currency trends Thursday: Fed chief Powell comments taken as dovish, weighing dollar

U.S. one-dollar currency notes; taken September 2018.U.S. one dollar bills.

The U.S. dollar dropped sharply on Wednesday after comments from U.S. Federal Reserve chief Jerome Powell were taken as a dovish signal that the central bank’s tightening cycle may be nearing an end.

Powell said that the central bank’s benchmark rate was “just below” where it estimated the “neutral” level would be. A neutral level would neither stimulate nor slow the economy. The comments, made in a speech Wednesday at the Economic Club of New York, were taken by market as a signal that the Fed would pause its hiking cycle as it marked a shift from his comments in October that rates were a “long way from neutral.”

Kathy Lien, managing director of foreign-exchange strategy at BK Asset Management, said in a note on Wednesday U.S. time there were two possible interpretations of Powell’s comments: The Fed now knows were the neutral rate is or it believes a pause in rate hikes is now needed.

“Chances are it’s the latter because economic data has been weakening, stocks have been falling and lower oil and gas prices restrict rather than encourage inflation. As a result, consistent rate hikes are no longer necessary,” she said.

She noted this didn’t actually change market interest rate projections much, with Fed fund futures continuing to price in a December hike and a pause in March, and only one full rate hike in 2019.

Is neutral the end?

To be sure, other analysts pointed out that a neutral rate isn’t necessarily the Fed’s end-point.

“There may be a tendency to confuse ‘neutral’ as a cyclical end point for rate hikes. That is not the meaning of the concept,” Derek Holt, head of capital markets economics at Scotiabank, said in a note on Wednesday.

“That we are just below the bottom end of the neutral rate range is entirely consistent with still being on track for a cyclical overshoot so there isn’t anything necessarily being signaled here,” he added.

Currencies

The U.S. dollar index, which measures the greenback against a basket of currencies, was at 96.38 at 7:05 A.M. SGT, down sharply from as high as 97.53 in Wednesday’s session, according to ICE futures data.

The 10-year U.S. Treasury note yield was at 3.058 percent at 7:38 A.M. SGT after dropping as low as 3.043 percent from as high as 3.070 percent in Wednesday’s session, according to Tullett Prebon data.

The euro/dollar was at 1.1370 at 7:43 A.M. SGT after trading in a 1.1265 to 1.1387 range on Wednesday, according to DZHI data.

The British pound/dollar was at 1.2828 at 7:43 A.M. SGT after trading in a 1.2731 to 1.2847 range on Wednesday, according to DZHI data.

The dollar/yen was at 113.539 at 7:44 A.M. SGT after trading in a 113.43 to 114.037 range on Wednesday, according to DZHI data.

The dollar/yuan closed Wednesday at 6.9538 after trading in a 6.9493 to 6.9568 range during the session, according to DZHI data.

The dollar/Singapore dollar was at 1.3728 at 7:45 A.M. SGT after trading in a 1.3710 to 1.3787 range on Wednesday, according to DZHI data.

The dollar/Malaysian ringgit was at 4.1980 at Wednesday’s close after trading in a 4.1900 to 4.2000 range during the session, according to DZHI data.

The dollar/Indonesian rupiah ended Wednesday at 14,520 after trading in a 14,507 to 14,649 range during the session, according to DZHI data.

 

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