Amanda Cooper and Tom Westbrook
LONDON/SINGAPORE (Reuters) – The dollar rose on Thursday, reversing some of the previous day’s losses after the Federal Reserve forecast just one rate cut this year, although milder-than-expected U.S. inflation curbed some of that gain.
The yen remained under strong pressure ahead of Friday’s Bank of Japan meeting, with traders bracing for more volatility in the currency.
Price action in the foreign exchange market was relatively subdued on Thursday compared to the previous day, with the dollar falling nearly 1% at one point in the immediate aftermath of the Consumer Price Index (CPI) data before finishing the day down 0.5%. – still the biggest in two weeks.
US consumer prices were unchanged in May from April, despite market expectations of a 0.1% rise.
“I think the reaction to the CPI was a little overdone. It was almost a relief that the situation hadn’t gotten worse. And that’s what caused such a strong knee-jerk reaction,” City Index market strategist Fiona Cincotta said.
“We’ve seen the dollar decline, as we heard from the Fed, and it’s also trending higher today. In the cold light of day, perhaps the inflationary imprint may not have been as chilling as at first. the market has taken that into account,” she said.
Inflation rose 3.4% annually, still well above the Fed’s 2% target.
Later on Wednesday, the Federal Reserve left interest rates unchanged at 5.25% to 5.5%, and policymakers’ average forecast for the number of cuts this year fell to one, down from three in March.
Despite the Fed’s guidance, markets have stuck with nearly two 25 basis point rate cuts this year, helping to offset some of the dollar’s losses.
“Markets believe the US dollar is weakening in the interim,” said Westpac strategist Imre Speizer in Auckland. “This is (mostly) due to the Fed rate cuts that are still baked into this year.”
On Wednesday, the euro staged its biggest one-day rally in 2024 following US inflation data. The European single currency has been subject to strong volatility this week driven by political uncertainty in France, where poor results in European Union elections prompted French President Emmanuel Macron to call early voting.
The euro, which hit a six-week low earlier this week, remained at around $1.08 that day, having jumped 0.64% the previous day. The derivatives market shows that the premium traders will pay for an option to sell the euro rather than buy it has risen to its highest level since April.
Sterling, which also faces political risks from the upcoming UK general election on July 4, was unchanged at $1.2795, having gained 0.5% overnight.
US Federal Reserve Chairman Jerome Powell struck a familiar tone at his press conference and stressed that policymakers will be sensitive to economic data. Although smaller cuts were predicted for this year, policymakers have planned them for 2025 or 2026.
However, this was little consolation for the yen, which is struggling with downward momentum while the gap between near-zero rates in Japan and much higher short-term rates in the United States is wide.
The Bank of Japan wraps up a two-day policy meeting on Friday, and markets are awaiting some kind of announcement or signal that the bank will back off from massive bond purchases to allow Japanese bond yields to rise further.
This leaves the yen vulnerable to disappointment. It was last at 157.23 per dollar and was weak on crosses – where it hit a 17-year low of 97.06 overnight and a 16-year low of 200.91 per pound.
Implied volatility in overnight options, a measure of traders’ demand for protection from large currency moves, rose to its highest level in six weeks.