The dollar weakened against other major currencies on Thursday, as markets took Federal Reserve Chairman Jerome Powell’s comment that U.S. interest rates were just below neutral as a signal that a three-year rate-hiking cycle is nearing an end.
The dollar index, which measures the value of the greenback against a basket of other major currencies, fell 0.2 percent to 96.64 — its lowest level in almost a week.
Powell took markets by surprise on Wednesday when he noted that the policy rate, at 2 to 2.25 percent, is now “just below” the broad range of estimates of neutral, which in September was 2.5 to 3.5 percent.
That marks a departure from comments in October, when Powell said rates were a “long way from neutral at this point”.
“Clearly, Powell’s comments about where the neutral interest rate is has created a shift in market expectations with respect to Fed policy,” said Jane Foley, a senior currency strategist at Rabobank in London. “That is a dovish factor for the dollar and is positive for risk appetite.”
That shift was reflected in money markets, where expectations of Fed rate increases declined to around 47 basis points over the next year from 52 basis points earlier this week.
The dollar was also weaker across the board and was last down 0.4 percent at 113.25 yen and a quarter of a percent weaker against the euro. The euro fetched $1.1394, having touched $1.13975 – its highest in almost a week.
Benchmark 10-year U.S. Treasury yields fell to their lowest level since September at 3.013 percent on Thursday, adding to the bearish sentiment towards the dollar.
Focus now turns to the release this session of the October U.S PCE price index, the Fed’s favoured inflation gauge, for more clues on the outlook for U.S. interest rates. Minutes from the Fed’s November meeting are also released later in the day.
Analysts said the minutes were likely to reaffirm market expectations for a rate hike in December but were unlikely to have a significant impact, since market focus has now turned to whether the Fed will pause the tightening cycle next year.
Dollar weakness in the wake of Powell’s comments was expected to be limited, given a note of caution ahead of the G20 summit on Friday and Saturday where U.S. President Donald Trump and China’s President Xi Jinping are scheduled to discuss contentious trade matters.
Elsewhere, sterling rose to $1.2830 but weakened 0.2 percent against the euro to 88.81 pence, reflecting uncertainty about whether British Prime Minister Theresa May be able to get her Brexit deal approved by a fractious parliament.
The Bank of England warned on Wednesday that Britain risked a bigger hit to its economy than it suffered from the global financial crisis a decade ago if it leaves the European Union in a “disorderly” manner, which would include a 25 percent crash in the value of the pound.