As the Fed says deflation is in play, the dollar falls

By Rae Wee

SINGAPORE (Reuters) – The dollar fell on Thursday after the U.S. Federal Reserve said it had turned a corner in its fight against inflation, reassuring markets that the end of the central bank’s rate hike campaign is near.

Investors took a startling signal from Federal Reserve Chairman Jerome Powell’s remarks on Wednesday that “the process of deflation has begun” in the world’s largest economy, although he also signaled that interest rates will continue to rise and cuts are on the way. is not.

Wednesday’s statement by the Federal Reserve, which came after its two-day policy meeting in which policymakers agreed to raise interest rates by 25 basis points, was the central bank’s first outright acknowledgment of deflation.

Following Powell’s comments, the dollar fell. Against a basket of currencies, the US dollar index fell to 100.80 on Wednesday.

It was last down 0.07% at 100.88, down more than 1% on Wednesday.

Ray Attrill, head of FX strategy at National Australia Bank (NAB), said: “It was kind of a relief … that there wasn’t anything that really challenged the prevailing view of the market.”

“(Powell) said rates should be on hold for a while, but that doesn’t stop the market from saying it could be six months instead of two years.”

Aussie touched an eight-month high of $0.7158 in early Asian trade on Thursday, last buying at $0.7150 after rising 1.2 percent in the previous session.

The kiwi similarly hit a fresh eight-month high of $0.65365 after jumping more than 1 percent on Wednesday.

Against the Japanese yen, the dollar fell more than 0.5 percent to a low of 128.17.

With the Federal Reserve out, the stage is set for the European Central Bank (ECB) and the Bank of England (BoE) to announce their interest rate decisions later on Thursday. Expectations are for an increase of 50 bp each.

The euro touched a near 10-month high of $1.1034 on Thursday and was last up 0.3 percent at $1.1023, while sterling added 0.14 percent to $1.2392.

NAB’s Attrill said: “The risk is that we get a 50% from the ECB and a 50% from the Bank of England. That could cause a bit of volatility.”

Euro zone inflation fell for a third consecutive month in January, data showed on Wednesday. But any relief for the ECB may be limited, as core price growth has remained flat and concerns have been raised about the reliability of the figures.

Tarek Horchani, Head of Prime Brokerage at Maybank Securities, said: “In Europe, despite lower energy prices, inflationary pressures remain very high.

We should see the ECB continue to raise interest rates until at least the end of the first quarter of 2023.”

In the United States, Friday’s nonfarm payrolls report will be the Fed’s next test of its fight against inflation, although official data on Wednesday showed job openings unexpectedly rose in December, pointing to a still-tight labor market. he does.

Markets now expect the Fed funds rate to fall below 4.9 percent by June, compared with a peak of less than 5 percent previously.

(Reporting by Rae Wee; Editing by Stephen Coates and Bradley Perrett)

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