The dollar rebounded from two and a half month low on Wednesday as the minutes from the Federal Reserve’s last meeting hinted that interest rates would likely remain restrictive for some time, even as the rate-hike cycle appeared to be over.
The Fed minutes showed the central bank would proceed “carefully” and that “all participants judged it appropriate to maintain” the current rate setting.
Fed officials agreed they would only raise interest rates if progress in controlling inflation faltered, reiterating recent comments by policymakers that left the door open for more tightening even as markets have moved to price rate cuts from early next year.
Markets are all but certain that the Fed will hold rates at their December meeting, while pricing in about a 27% chance of a rate cut as early as March, according to CME’s FedWatch Tool.
“Almost four rate cuts are fully priced for next year and that looks very aggressive,” said Niels Christensen, chief analyst at Nordea.
“That said, it’s not unusual for the Fed to cut by 50 basis points when they start cutting, so it could be possible,” Christensen added.
The dollar index, which measures it against a basket of currencies, was 0.2% higher at 103.78, pulling away from its lowest level since the end of August at 103.17 it touched on Tuesday.
The index is down about 2.6% in November and on course for its worst monthly performance in a year.
Analysts also said market participants were eager to take money off the table before liquidity fizzles out before the US Thanksgiving Holiday.
High US Treasury yields, which have buoyed the dollar, have also tumbled from multi-year highs hit in October as investors ramp up bets that the Fed has finished increasing rates following a slowdown in US inflation in the same month.
Treasury yields slipped again overnight, with the yield on the benchmark 10-year note last at 4.4003%
The euro last sat at USD 1.0894 after rising to USD 1.09655 on Tuesday, its highest against the dollar since mid-August.
Sterling was down 0.2% at USD 1.2518, not far from a two-month high of USD 1.2558 touched on Tuesday.
Britain’s finance minister, Jeremy Hunt, announces his Autumn Statement later on Wednesday which is likely to include tax cuts for business and possibly some voters too.
“We think some looser fiscal policy will be welcomed by sterling at this juncture,” said ING strategist Chris Turner.
The Japanese yen was off 0.6% to 149.265 per dollar, after hitting a two-month high of 147.155 on the dollar on Tuesday.
The Asian currency is up 1.6% against the dollar in November but is still down 12% for the year.
While speculation that the Bank of Japan could exit from negative interest rates early next year should help stabilise the Japanese currency, it still faces strong headwinds, but for now, analysts think the risk of intervention has faded.
“The move in November is taking the pressure off the Bank of Japan,” Nordea’s Christensen said.
“They’re keeping their powder dry and hoping for a softer dollar so they don’t need to intervene.”
More than 80% of economists in a Reuters poll said the Bank of Japan would end its negative interest rate policy next year, with more convinced the central bank is getting closer to exiting its controversial monetary settings.
In cryptocurrencies, bitcoin was up 2.3% at USD 36,569 a day after prosecutors said Binance chief Changpeng Zhao will step down and plead guilty to breaking criminal US anti-money laundering laws as part of a USD 4 billion settlement resolving a years-long investigation into the world’s largest crypto exchange.
