SINGAPORE/LONDON, Feb 2 (Reuters) – The euro hit a 10-month high against the dollar, a day after the U.S. Fed, ahead of a European Central Bank meeting where markets expect a half-percent rate hike. Reserves slowed down to 25 basis points.
The Federal Reserve also said it had turned a corner in its fight against inflation, its first outspoken acknowledgment that price rises are slowing, underpinning market expectations that the central bank’s rate hike campaign is nearing the end and tapering will follow.
The dollar’s most dramatic fall overnight came after Federal Reserve Chairman Jerome Powell said at a post-meeting news conference that “the process of deflation has begun,” although he also signaled that interest rates will continue to rise. And the reduction is not coming.
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.”
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“(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.”
The Bank of England also meets on Thursday, with a rate decision due at 1200 GMT before the ECB at 1315 GMT. Markets are also expecting a half point rate hike from the Bank of England.
Sterling, which gained 0.47 percent on Wednesday, held steady at $1.236, and the dollar fell against the Japanese yen to 128.07, its lowest level in two weeks.
The euro hit $1.1034 in Asian trade on Thursday, its highest since April 4, and jumped 1.2 percent on Wednesday. It was last at $1.100 which was almost flat that day as the focus was on the ECB meeting.
“A 50 basis point hike is widely expected, as is a hawkish message that supports pricing 75 to 100 basis points higher in the summer,” Chris Turner, head of global markets at ING, said in a note.
A sharp narrowing of the spread could become a bigger driver for EUR/USD this year and should push it to the $1.15 area in the second quarter.
The derivatives market is showing the lowest premium on the dollar-to-euro rate since late 2021, Turner said.
Also among the drivers were the Australian dollar, which rose 1.2 percent on Thursday to hit an eight-month high of $0.7158 in early Asian trade, and the Swiss franc, which hit its highest level since late 2021 on Thursday. It was faster on Wednesday.
Against a basket of currencies, the US dollar index fell by more than 1 percent to 100.80 units in the last 9 months and traded slightly higher on Thursday.
Friday’s US non-farm payrolls report will be the Fed’s next test to combat inflation, although official data on Wednesday showed job openings rose unexpectedly in December, pointing to a still tight labor market. .
Reporting by Rae Wee in Singapore and Alun John in London. Edited by Bradley Pratt, Robert Birsel
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