Major currencies held onto their gains on Thursday against a dollar hit by weaker-than-expected US inflation, except the yen which remained squeezed ahead of the Bank of Japan meeting as US policymakers signaled that rates they will be kept high for a while longer.
Overnight, the euro advanced 0.6% and broke above its 200-day moving average, last buying $1.0804. The Australian dollar was 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 stronger in the aftermath of the U.S. inflation report, which showed consumer prices flat month-on-month in May, against market expectations of a 0.1% increase.
They were scaled back as the Federal Reserve left the funds rate stuck at 5.25-5.5% and policymakers’ median projection for the number of cuts this year fell to just one, from three in March.
The pound rose 0.5% overnight to $1.2798, and was slightly lower as European markets opened. Movements were modest in Asian trade, although more beaten-down currencies, such as Indonesia’s rupiah, saw some relief.
Despite the Fed’s projections, markets continued to expect nearly two 25 basis point rate cuts this year.
“I think markets are looking at the US dollar as weakening, with fluctuations in between,” said Imre Speizer, a strategist at Westpac in Auckland. “This is (mostly) due to the Fed rate cuts, which are still expected this year.”
The Chinese yuan was stable at 7.2660 in offshore trading, after gaining slightly on the dollar overnight.
Fed Chairman Jerome Powell struck a familiar tone in his press conference and stressed that policymakers will be sensitive to economic data. While fewer cuts were expected this year, policymakers had planned them for 2025 or 2026.
“While the rate cut outlook has been more hawkish than in (March), we think the details temper that hawkishness,” said John Velis, Americas macro strategist at BNY, noting that 8 of 19 policymaker projections called for two cuts this year.
Still, it was little consolation for the yen, which is struggling with downward pressure while the gap is so wide between near-zero Japanese rates and much higher short-term U.S. rates.
The Bank of Japan will wrap up a two-day policy meeting on Friday and markets are expecting some kind of announcement or signal that the bank will pull back from massive bond purchases to allow Japanese yields to rise further.
This leaves the yen vulnerable to disappointment. It last faltered at 157.08 against the dollar and lost ground on crosses – where it hit a 17-year low at 97.06 for the kiwi overnight and a 16-year low at 200.91 against the GBP.
“We expect the BOJ to fall short of expectations, which may push down Japanese interest rates and the yen,” said Kristina Clifton, senior strategist at Commonwealth Bank of Australia.
“Communications from BOJ officials suggest it wants to take the time necessary to readjust policy settings.”
