The Federal Reserve kicked off its monetary easing cycle on Wednesday with a larger-than-usual half-percentage-point interest rate cut, which Chairman Jerome Powell said was aimed at signaling policymakers’ determination to keep unemployment low now that inflation has eased.
The size of the rate cut had been predicted by investors, as many media outlets had pointed to the direction of the cut before the decision was made, but economists surveyed by Reuters were predicting a 25 basis point cut, overturning previous expectations.
Still, markets responded in a classic “buy the rumor, sell the fact” manner, with the dollar dominating early Asian trading. The greenback rebounded from its lowest level in more than a year against major currencies in the previous session and was last up slightly to $101.03.
The US dollar rose 0.58% against the yen to $143.12, while the euro was down 0.04% to $1.1113, down from a three-week high hit the previous day.
“Obviously, there’s been a lot of volatility around the announcement, but in some ways it’s not that controversial, given the price action and the information that was released,” said Rodrigo Catril, senior currency strategist at National Australia Bank. “It’s pretty close to what the market has been pricing in, especially given our expectation of a 100 basis point cut, maybe a little bit more this time, and another 100 basis point cut next year, and a final rate below 3%. So the big picture doesn’t change that much.” Fed policymakers on Wednesday projected rates would fall another 0.5% by the end of this year, 1% next year and 0.5% in 2026, but said any outlook that far out was necessarily uncertain.
“We see the dollar falling next year. This is a cyclical story, not a structural story,” Erik Robertsen, global head of research and chief strategist at Standard Chartered Bank, said at a media roundtable in Singapore on Wednesday.
“We believe the dollar will weaken as the Fed eases interest rates and the global economy experiences a soft landing, a favorable scenario that tends to be negative for the dollar.”
The pound fell 0.11% to $1.3199 after hitting $1.3298 in the previous trading day, its highest level since March 2022.
This comes after data on Wednesday showed that UK inflation remained stable in August but rose in the Bank of England’s closely watched services sector, strengthening expectations that the central bank would keep interest rates on hold later in the day.
“When it comes to the Bank of England, yesterday’s inflation figures clearly show that they still have concerns and problems with inflation, with services inflation in particular still unreassuringly high,” said NAB’s Catril.
“So to expect monetary easing today because of the Fed’s actions seems a bit implausible.”
Meanwhile, the Australian dollar rose 0.05% against the US dollar to $0.6768, while the New Zealand dollar rose 0.04% to $0.6210.
Data released on Thursday showed New Zealand’s economy contracted in the second quarter as activity in many industries fell, but the figures were stronger than expected.
