Dollar holds soft tone on rate cut expectations, Powell comments
The U.S. dollar loitered near four-year lows against the euro and a one-month trough against the yen on Wednesday, as traders geared up for a near-certain interest rate cut from the Federal Reserve later in the session.
Traders have fully priced in a 25 basis point cut and the focus will be on comments from Chair Jerome Powell after the decision to gauge the pace of future easing. Markets are pricing 67.9 bps of cuts by the end of the year.
The spotlight will also be on whether policymakers considered a bigger 50 bps cut at a time when President Donald Trump pushes ahead with a rushed effort to overhaul a pillar of the U.S. economy, stoking concerns about the central bank's independence.
The euro wobbled at $1.1858, just below the four-year high of $1.18785 it touched on Tuesday. Sterling was steady at $1.3649, hovering near 2-1/2-month highs.
The dollar index, which measures the U.S. unit against six others, was at 96.686, languishing near its lowest since early July.
ING economists said material market impact would have to come from either a surprise 50 bp cut, or commentary from Powell that swings dramatically in either a decidedly hawkish or dovish direction.
"A 25 bp cut gives room for a somewhat dovish leaning, while a 50 bp cut would allow Chair Powell to be as hawkish as he likes, as the move itself would dominate aggregate impact," they said in a note.
The Fed began a two-day meeting on Tuesday with a new governor on leave from the Trump administration joining the deliberations, and a second policymaker at the table still facing efforts by President Donald Trump to oust her.
A federal appeals court on Monday blocked Fed Governor Lisa Cook's firing, paving the way for the Biden appointee to participate fully in the policy meeting this week.
Tony Sycamore, market analyst at IG, expects Powell to sound dovish, highlighting the increased downside risks to labour markets and expressing a willingness to continue cutting rates further if these risks persist.
"In light of that, we believe any 'buy the rumour, sell the fact' reaction will be short-lived, given the possibility of follow-up 25 bp rate cuts in October and December."
Data on Tuesday showed U.S. retail sales increased more than expected in August as consumers bought a range of goods and dined out, but a weakening labour market and rising prices because of tariffs pose a downside risk to continued strength in spending.
The Japanese yen firmed to 146.22 per dollar, its strongest in a month ahead of the Bank of Japan policy meeting on Friday where the central bank is expected to stand pat on rates.
The spotlight is on the October 4 voting where the ruling Liberal Democratic Party will elect a new leader to replace outgoing Prime Minister Shigeru Ishiba.
"It is unlikely BOJ will move ahead of the elections and considering the potential Fed cut to come this week," said Howe Chung Wan, head of Asian fixed income at Principal Asset Management.
"Our base case is for the next hike to take place in early 2026 as markets may take time to see how the new leadership comes into place."
