US dollar wobbles after Fed pushes back against rate hike speculation

[TOKYO] The US dollar was on the defensive on Thursday after the Federal Reserve signalled it was in no hurry to raise interest rates through all of 2023 even as it saw a V-shaped recovery in the world's largest economy.

Investors dumped the US dollar and rushed to more risk-sensitive currencies as Fed Chairman Jerome Powell, true to his dovish credentials, dampened speculation a stronger economic outlook could propel the central bank to wind back its stimulus.

"It was the usual Jay after all," said Bart Wakabayashi, Tokyo Branch Manager of State Street Bank.

"Markets have been thinking the Fed will raise rates perhaps once next year and a couple of more times in 2023... There will remain questions over whether the Fed can control inflation."

The dollar index dropped 0.5 per cent to its lowest levels in two weeks and last stood at 91.400.

The US central bank now sees the economy growing 6.5 per cent this year, which would be the largest annual jump in gross domestic product since 1984 and a whopping 2.3 percentage points upgrade from its projection just three months ago.

Inflation is now expected to exceed the Fed's 2 per cent target to 2.4 per cent this year, though Fed officials think it will move back to around 2 per cent in subsequent years, thus allowing them to keep interest rates at current low levels.

The Fed's so-called "dot plots" put policymakers' median projection of interest rates at zero per cent in 2023, even though seven of 18 officials now expect higher rates in 2023, compared to five in December.

The US dollar slipped to 108.87 yen, off Monday's nine-month top of 109.365 while the euro rose to US$1.1980, edging near last week's high of US$1.1990.

The 10-year US Treasuries yield gyrated wildly before settling around 1.648 per cent for now, having hit an 13-month high just before the Fed's announcement.

Traders, however, see potential for further market volatility.

"While our view remains that movements in yields through the latter part of February and into March have been akin to a 'taper-less tantrum', there is potential for further market volatility, perhaps around 'data tantrums' over the coming months," wrote Gurpreet Gill, macro strategist at Goldman Sachs Asset Management in London.

The British pound traded at US$1.3970, having gained about 0.5 per cent overnight.

The Bank of England is expected to keep its benchmark Bank Rate at a historic low of 0.1 per cent and its bond-buying programme unchanged at 895 billion pounds later in the day.

"Similar to what we've seen from the Fed, the Bank of England will talk up their prospects of the economy relative to where we've been, but at the same time emphasize that we're still a long way from full recovery," said Rodrigo Catril, senior currency strategist at National Australia Bank in Sydney.

"We expect the BoE to gently warn against the shift in market pricing from a rate cut to around 50bps of hikes over the next three years." The Australian dollar rose to a two-week high of US$0.78105 whereas its New Zealand counterpart briefly lost momentum, after the country posted a surprise contraction in GDP in the final three months of last year.

The kiwi dollar last traded at US$0.7247.

Elsewhere, the Brazilian central bank delivered its first interest rate hike in nearly six years with a larger-than-expected 75 basis point increase to 2.8 per cent, and flagged a similar move in May to fight inflation.

There was no reaction in the Asian morning as the Brazilian real is hardly traded offshore, with few quotes available, traders said.

Bitcoin held firm at US$58,490, having bounced from Tuesday's one-week low of US$53,221.

REUTERS