Dollar plunges as Fed says disinflation now in play

SINGAPORE (Reuters) – The dollar tumbled on Thursday after the U.S. Federal Reserve said it had turned a corner in the fight against inflation, giving markets a confidence boost that the end of its rate-hike campaign is near.

Investors took a dovish cue from Fed Chair Jerome Powell‘s remarks on Wednesday that “the disinflationary process has started” in the world’s largest economy, although he also signalled that interest rates would continue rising and that cuts were not in the offing.

The Fed‘s statement on Wednesday, which came after the conclusion of its two-day policy meeting where policymakers agreed to raise rates by 25 basis points, marked the central bank’s first explicit acknowledgment of slowing inflation.

The dollar dived following Powells remarks, and against a basket of currencies, the U.S. dollar index fell to a fresh nine-month low of 100.80.

It was last 0.12% down at 100.83, having fallen more than 1% on Wednesday.

“It was very much a sort of relief … that there was nothing there to really seriously challenge the markets prevailing view,” said Ray Attrill, head of FX strategy at National Australia Bank (NAB).

“(Powell) said that rates are going to have to be restrictive for some time, but that doesnt dissuade the market from saying some time might be six months, rather than two years.”

The Aussie jumped to a new eight-month high of $0.7158 in early Asia trade on Thursday, after rallying 1.2% in the previous session.

Against the Japanese yen, the dollar fell 0.55% to 128.21.

The kiwi, which similarly jumped more than 1% on Wednesday, was last 0.25% higher at $0.6523.

With the Fed out of the way, the stage is set for the European Central Bank (ECB) and the Bank of England (BoE) to announce their rate decisions later on Thursday, where expectations are for a 50bp hike from each.

The euro rose to a roughly 10-month peak of $1.1034 on Thursday, after gaining 1.2% in the previous session, while sterling was last 0.19% higher at $1.2399.

“The risk is that we get a hawkish 50 from the ECB and a dovish 50 from the Bank of England, that might create some volatility,” said NABs Attrill.

Euro zone inflation eased for the third straight month in January, data on Wednesday showed, but any relief for the ECB may be limited as underlying price growth held steady and concerns have already been raised about the reliability of the figures.

“I don‘t think that’s going to influence the messaging from the ECB, which I think is still going to be that (theyve) got a lot to do,” Attrill said.

In the United States, Friday‘s nonfarm payrolls report will be the next test of the Fed’s fight against inflation, though Wednesdays JOLTS report showed that job openings unexpectedly rose in December, pointing to a still-tight labour market.

Markets are now expecting the Fed funds rate to peak just under 4.9% by June, compared with earlier expectations of a peak of just below 5%.