Singapore, May 4 (BNA): The dollar fell against most major currencies on Thursday after the US Federal Reserve opened the door to a pause in its aggressive tightening cycle, although markets suffered from risk aversion amid a decline in regional US bank stocks.
The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a percentage point, as expected, but backtracked from the language of its policy statement that it “expects” more rate increases will be needed, Reuters reported.
This sent the US dollar broadly lower and Treasury yields tumbling after the decision, with traders taking the comments as a signal of a peak in US interest rates and moving to cut rates later this year.
In weak Asian trading on Thursday, the British pound rose 0.2% to a nearly 11-month high of $1.25905, while the euro rose 0.19% to $1.1082, flirting with its latest peak in a year.
Markets in Japan remain closed for the holiday.
“The most notable part of the statement was the section outlining policy prospects going forward, as the FOMC softened its language regarding the need for additional monetary tightening,” said Jay Bryson, chief economist at Wells Fargo.
“Additional tightening may be needed…but the FOMC does not appear pre-committed to another rate hike on June 14th.”
The US dollar index was down 0.14% at 101.09, after falling more than 0.6% in the previous session.
Money markets are now pricing in a little over 10% chance that the Fed will start cutting rates in June, and expect nearly 80 basis points of rate cuts through the end of the year.
Adding to expectations, the Fed will soon have to start easing monetary conditions were lingering concerns of banking sector turmoil, intensified by news that PacWest Bancorp (PACW.O) is exploring strategic options. The Los Angeles-based bank said it has been approached by several potential partners and investors.
Shares of PacWest and several other US regional lenders fell in after-market trading on Wednesday.
Cautious risk sentiment kept the Japanese yen – a traditional safe haven in times of market turmoil – well supported, with the currency up around 0.1% against the US dollar, to 134.56.
It jumped more than 1% on Wednesday, helped by a drop in US Treasury yields.
The risk-sensitive Australian and New Zealand dollars reversed earlier losses over the course of Asian trade, with both currencies rising 0.3% each to $0.6692 and $0.6249, respectively.
“There are a lot of concerns in the US about the banking sector and the credit crunch. This is a credit event and it’s feeding into the economy very quickly,” said Jarrod Kerr, chief economist at Kiwi Bank.
“So I think central banks, including the Federal Reserve, are at or very close to peaking in their liquidity levels.”
The European Central Bank (ECB) comes under the spotlight next, as ECB policymakers are expected to raise interest rates for the seventh consecutive meeting later on Thursday.
Rial