By Alden Bentley
NEW YORK (Reuters) – The dollar fell and sterling rose to the highest level in more than two years on Friday after Federal Reserve Chairman Jerome Powell gave an unequivocal signal that the long-awaited U.S. interest rate cut would happen next month.
The weak dollar also pushed the euro to a 13-month high, and the US currency hit a 17-day low against the yen.
During his keynote address at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming, Powell said: “The time has come for policy adjustment” as upside risks to inflation have diminished and downside risks to employment has increased.
“We do not seek or welcome any further cooling in labor market conditions,” Powell said. “We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate policy reversal, there is good reason to think that the economy will return to 2% inflation, while maintaining inflation. strong labor market.”
Traders on Friday continued to bet on a quarter-percentage-point rate cut at the Fed’s Sept. 17-18 meeting, with odds set at 65% after Powell’s comments. But they had priced in about a one-in-three chance of a larger 50 basis point cut, compared to just over a one-in-four chance previously.
The euro and the yen rose. This weakened the , which measures the dollar against a basket of six currencies, including these two. The index fell 0.81% to 100.64 from late Thursday, after firming slightly before Powell spoke.
“I think the market reaction, which was a little bit weaker dollar and a little bit lower bond yields, was about right. It’s not like he said, ‘Yes, we’re going to do three 50s cuts first.’ the easing cycle,” said Steve Englander, head of G10 FX research at Standard Chartered (OTC:) Bank in New York.
“At some point it implicitly opens the door to the 1950s, without giving a timetable. We still don’t think 50 (bps) will be the first step, but it could come soon if the labor market continues to weaken. he said, referring to the Fed chief’s comments on inflation and employment.
A move in September would see the Fed move away from a restrictive interest rate policy in place since it hiked rates in March 2022 to combat inflation, raising the Fed funds target from around zero to 5.25%-5.5 %, where it has been since July. 2023.
Later on Friday, Federal Reserve Bank of Chicago President Austan Goolsbee said in a CNBC interview that while he is unwilling to explicitly call for a central bank rate cut, monetary policy is quite tight and not in line with current economic conditions.
“FX is a relative game, so expectations that the Fed will soon join the other major banks in cutting rates is driving the dollar lower,” said Uto Shinohara, managing director and senior investment strategist at Mesirow in Chicago.
Sterling climbed to a more than two-year high against the dollar as Powell’s negative comments on the dollar coincided with signs of strength in the British economy.
The pound rose 0.94% to $1.3211 in the afternoon. It reached $1.32295, the highest level since late March 2022, after surpassing the 2023 high of $1.3144.
A survey showing UK consumer confidence at its highest point in almost three years in August added to positive signals in the wider economy.
The euro ended up 0.75% at $1.1195, just below an afternoon high of $1.12015, a price not seen since July 20, 2023.
The dollar/yen fell to its lowest level since August 6, ending the day down 1.36% to 144.27.
The yen has gained support since BOJ Governor Kazuo Ueda earlier on Friday reaffirmed his decision to raise rates if inflation remained on track to sustainably reach the bank’s 2% target.
The “comments suggest that market turbulence will not deter the BOJ from considering more rate hikes in the future, even if the next step is not imminent,” said Vasu Menon, director of investment strategy at OCBC.
“As long as the dollar-yen movement is orderly and gradual, it will not roil global markets as it did earlier this month.”
Against the Swiss franc, the dollar weakened 0.52% to 0.848 francs.
Dollar/Canada fell 0.82% to C$1.3511.
The Australian dollar strengthened 1.36% to US$0.6795. It strengthened 1.53% to $0.6229.
rose 4.2% to $63,227.00.
