Dollar drops on U.S. rate outlook

The dollar dropped to its lowest since October 21 at 98.537

The dollar fell out of favour on Thursday after the U.S. central bank delivered a less hawkish outlook than some had anticipated, giving investors confidence to short the currency as they bet on two more rate cuts next year.

The central bank at the conclusion of its two-day policy meeting cut rates by 25 basis points, but remarks from Chair Jerome Powell at his post-meeting press conference surprised some who had been positioned for a more hawkish tone.

For us, the big takeaway was a dovish tilt to the accompanying commentary, and at Fed Chair Powell’s press conference, said Nick Rees, head of macro research at Monex Europe.

As a result, investors sold the dollar, which in turn pushed the euro above the key $1.17 level and close to a two-month high of $1.1707 in Asia trade on Thursday.

Against other major currencies, the dollar dropped to its lowest since October 21 at 98.537.

I think most were looking for a rerun of the same hawkish sentiment which we saw in that October FOMC meeting. But this has certainly a different tone about it, the commentary’s different, the T-bill buying supportive, the vote certainly wasn’t as hawkish as everybody expected, said Tony Sycamore, a market analyst at IG.

Wednesday’s outcome reinforced market expectations for two more rate cuts next year, against the central bank’s median expectation for a single quarter-percentage-point cut next year.

The bank also announced that it would start buying short-dated government bonds to help manage market liquidity levels beginning December 12, with the initial round totalling around $40 billion in Treasury bills.

The earlier start and size of the T-bill purchases surprised investors, said analysts at Societe Generale in a note.