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FOREX-Dollar falls after Fed hike, Powell comments

FOREX-Dollar falls after Fed hike, Powell comments

Reuters · 07/27/2022 16:02
FOREX-Dollar falls after Fed hike, Powell comments

Updates with Powell comments

By Chuck Mikolajczak

- The dollar fell on Wednesday against a basket of major currencies after the U.S. Federal Reserve raised interest rates by 75 basis points, as was widely anticipated, and comments from Fed Chair Jerome Powell spurred hopes for a slower hiking path.

The central bank raised rates by three-quarters of a percentage point for the second straight meeting as it attempts to rein in inflation, but that while the labor market remains strong, other economic indicators have softened.

"You certainly can view the policy statement as hawkish but it is pretty consistent with what they have been saying for the last couple of meetings – they are going to continue to hike - estimates had them going into restrictive territory, they are at and they continue to think they are going to to go into restrictive territory," said Marvin Loh, senior global market strategist at State Street in Boston.

"Theoretically, the dollar should be stronger in an environment where it is hawkish but it was as expected and we have had a lot of movement in the dollar so far this month."

The greenback initially moved higher after the statement but quickly reversed course, and weakened further along with Treasury yields while U.S. stocks rallied as comments from Fed Chair Jerome Powell after the policy statement were seen as dovish.

"Hopes for a slower pace of rate hikes pushed expectations for additional rate hikes lower, bond yields lower, credit spreads tighter and stock prices higher," said George Bory, chief investment strategist for fixed income with Allspring Global Investments.

"Despite the initial pop in risk assets, much still hinges on inflation and the Fed’s ability to return 'inflation to its 2% objective.'"

Expectations for a 50 basis point hike at the Fed's September meeting grew to 60.9%, according to CME's Fedwatch Tool, up from 50.7% on Tuesday, while projections for a 75 basis point hike fell to 35.2% from 41.2%.

The dollar index =USD fell 0.756% to 106.310, with the euro EUR= up 0.97% to $1.0212. The greenback was on pace for its biggest one-day percentage drop since July 19.

Bets on oversized rate hikes helped push the dollar index =USD to a two-decade high earlier this month at 109.29, but the greenback has eased lately as economic data has hinted at a possible recession.

But on Wednesday, data showed the U.S. trade deficit sharply in June as exports jumped, while orders for -defense capital goods excluding aircraft, seen as a proxy for business spending plans, rose 0.5% last month, potentially soothing some concerns about the economy.

The euro recouped all of prior session's decline, which was the biggest one-day percentage drop for the currency in two weeks, but fears of a European recession remain high as Russia further slowed gas supplies to Europe through the Nord Stream 1 pipeline.

The gas crisis, along with political woes in Italy, will push the region into a mild recession by early year and limit the European Central Bank's path of interest rate hikes, analysts at JPMorgan said.

The Japanese yen JPY= strengthened 0.26% versus the greenback to 136.58 per dollar, while Sterling GBP= was last trading at $1.2175, up 1.25% on the day.

In cryptocurrencies, bitcoin BTC=last rose 8.65% to $22,792.02.

(Reporting by Chuck Mikolajczak; Editing by Kirsten Donovan and Nick Zieminski)

((charles.mikolajczak@tr.com; @ChuckMik;))