Major currencies maintained their gains on Thursday against a dollar hit by softer-than-expected U.S. inflation, except for the yen, which remained fragile ahead of the Bank of Japan meeting as U.S. policymakers signaled that rates they would stay high for a while longer.
Overnight, the euro advanced 0.6% and surpassed its 200-day moving average, last buying at $1.0804. The Australian dollar settled at $0.6647, after rising above $0.67 overnight, and the New Zealand dollar jumped to a five-month high above $0.62, before settling at $0.6170. . The yen fell about 0.2%.
The gains had been higher on the heels of the U.S. inflation report, which showed flat month-over-month consumer prices in May, versus market expectations for a 0.1% rise.
They were reduced when the Federal Reserve kept the funds rate at 5.25-5.5% and policymakers’ median projection for the number of cuts this year fell to just one, down from three in March.
Sterling rose 0.5% overnight to $1.2798 and was down slightly as European markets opened. Moves were modest in Asian trade, although battered currencies such as the Indonesian rupiah saw some relief.
Despite the Federal Reserve’s forecasts, markets continued to bet on nearly two 25 basis point rate cuts this year.
“I think markets see the dollar as weakening, with swings in between,” said Imre Speizer, a strategist at Westpac in Auckland. “That’s (mostly) due to the Fed’s rate cuts, which are still in the cards for this year.”
The Chinese yuan was steady at 7.2660 in offshore trading, having gained slightly against the dollar overnight.
Fed Chairman Jerome Powell struck a familiar tone in his news conference, stressing that policymakers would be sensitive to economic data. Although fewer cuts were expected for this year, policymakers had them planned for 2025 or 2026.
“While sentiment on rate cuts was tougher than in (March), we think the details moderate that toughness,” said John Velis, Americas macro strategist at BNY, noting that 8 of policymakers’ 19 forecasts They were from two cuts this year.
Still, it was cold comfort for the yen, which is fighting bearish momentum while the gap is so wide between near-zero Japanese rates and much higher short-term U.S. rates.
The Bank of Japan concludes a two-day policy meeting on Friday and markets are awaiting some kind of announcement or signal that the bank will reverse massive bond purchases to allow further rises in Japanese yields.
That leaves the yen vulnerable to disappointment. It last wobbled at 157.08 per dollar and was on the back foot at the crosses – where it hit a 17-year low of 97.06 per kiwi overnight and a 16-year low of 200.91 in sterling. .
“We expect the Bank of Japan to miss expectations, which may drive down Japanese interest rates and the yen,” said Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia.
“Communications from BOJ officials suggest that it wants to take its time to adjust its policy settings again.”
