Dollar edges lower after Fed rate cut, Aussie, Norwegian crown outperform

Reuters

Dollar edges lower after Fed rate cut, Aussie, Norwegian crown outperform

Sep 19, 2024 at 10:41 am GMT

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Prospect of further dollar weakness

Dollar index hit lowest in more than a year

Domestic data supports Australian, New Zealand currencies

Recasts lead, adds comments, background throughout

By Stefano Rebaudo

Sept 19 (Reuters) -The U.S. dollar dropped on Thursday after the Federal Reserve cut its interest rate by 50 basis points and revised its monetary policy outlook, with the Australian dollar and the Norwegian crown outperforming their peers.

Expectations had drifted towards a dovish outcome in the days before the Fed's decision on Wednesday, with money markets pricing around a 65% chance of a 50 basis point (bp) cut. Economists polled by Reuters were leaning towards a 25-bp cut.

"The Fed's decision was quite dovish, which bodes well with a rebound in risk and further near-term U.S. dollar weakness," said Lefteris Farmakis, forex strategist at Barclays.

"The bar, however, is quite high to lean on the Fed for more dollar weakness further out," he added. "The Fed easing cycle that markets are pricing in is quite significant."

Money markets priced in 70 bps of additional rate cuts in 2024 and 191 bps by September 2025. FEDWATCH

The dollar index =USD, which measures the dollar against a basket of six peers, was down 0.30% to 100.57. It slid to its lowest in more than a year of 100.21 in the previous session.

The big news is "the trimming of growth forecasts and the sharp downward revision of the dots," said Guy Stear, head of developed markets strategy at the Amundi Investment Institute.

"The Fed seems confident that it has won the battle against inflation, and recognises that monetary policy is now too restrictive, especially given the threats to growth."

Fed policymakers on Wednesday projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year and half of a percentage point in 2026, though they said the outlook that far into the future was uncertain.

The Australian and New Zealand dollars drew support from domestic data surprises.

Australian employment exceeded forecasts for a third straight month in August.

The data "should dispel thoughts of imminent easing from the Reserve Bank of Australia (RBA)," said Robert Carnell, regional head of research, Asia-Pacific, at ING.

"Until recently, there was an odd kink in the implied cash rate curve at the September meeting, indicating that some investors still believed the RBA would follow the Fed lower this month," he added.

The Aussie AUD=D3 was up 1.05% to $0.6834.

"The Australian dollar can receive short term support thanks to the Fed's dovish approach," Barclays' Farmakis said. "The economy’s reliance on China and slow growth outside the U.S., however, raise doubts on the sustainability of the rebound."

The kiwi NZD=D3, meanwhile, traded 0.89% higher at $0.6263, after data showed the New Zealand economy contracted by 0.2% in the second quarter, compared with the 0.4% fall expected.

Against the yen JPY=EBS, the dollar was 0.54% higher at 143.07.

Some analysts flagged a squeeze in short dollar/yen positions as markets took profit post-Fed.

The euro EUR=EBS rose 0.46% to $1.1169, but remained below a three-week high hit in the previous session.

The Norwegian crown rose in London trade and strengthened slightly after the central bank kept rates on hold but said it planned to cut in 2025.

It was last up 0.64% at $10.4550 NOK=D3.

"The statement shifts the dial only very slightly in a dovish direction," said Andrew Kenningham, chief Europe economist at Capital Economics.

"Policymakers also emphasised that the krone has depreciated and made it clear that this is the key factor keeping them in hawkish mode," he added.

Sterling GBP=D3 was up 0.45% to $1.3287 after hitting $1.3298 in the previous session, its highest since March 2022.

Data on Wednesday showed British inflation held steady in August, but sped up in the services sector closely watched by the Bank of England, reinforcing bets that the central bank will keep interest rates on hold later on Thursday. 0#BOEWATCH

World FX rates https://tmsnrt.rs/2RBWI5E

The Fed’s dot plot https://reut.rs/3Xo3JtO

Fed cuts rates by 50 basis points, joins easing cycle https://reut.rs/3MPDwzD

Reporting by Stefano Rebaudo; Editing by Shri Navaratnam, Mark Potter and Barbara Lewis

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