Dollar drops after shift in Fed policy

New York

THE dollar fell on Friday as the US Federal Reserve's new policy framework suggested that interest rates would remain low, while the yen surged after Japanese Prime Minister Shinzo Abe announced his resignation.

The yen significantly strengthened against the dollar after the news that Mr Abe, Japan's longest-serving prime minister, would step down due to worsening health.

Concerns about a possible shift away from Mr Abe's expansionary economic policy, known as Abenomics, drove the move in the safe-haven currency, investors said.

The US currency was last down 1.1 per cent against the Japanese yen at 105.38.

"You're seeing yen strength on a little bit of uncertainty," said Lou Brien, strategist at DRW Trading in Chicago. "Abenomics has been one of the more influential economic strategies," he said.

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The greenback resumed its slide against a basket of major currencies in the wake of Fed chairman Jerome Powell's remarks at the virtual Jackson Hole conference. Mr Powell said the US central bank would seek to keep inflation at 2 per cent, on average, so that periods of too-low inflation would likely be followed by an effort to lift inflation above 2 per cent for some time.

In practice, market participants expect that this means the current ultra-low rates will stay lower for longer, thereby pressuring the dollar. After recovering from an initial slide on Thursday immediately after Mr Powell's speech, the dollar weakened once again overnight.

The dollar index was last 0.7 per cent lower at 92.325.

Both the dovish Fed policy and a sluggish US economic recovery have helped to push down the dollar, said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

Ample Treasury issuance over the next month will also likely keep the greenback lower, Mr Schlossberg added. "The currency market is dubious about the long-term impact of the recovery in the US," he said. "So it's been favouring non-US assets."

As the US dollar weakened, the euro climbed 0.63 per cent to US$1.1896.

The euro's ascent puts it closer to a technical level near US$1.19, which it has tested periodically over the past month, investors said.

Currency markets were broadly pro-risk. The New Zealand dollar hit its highest against the US dollar since January while the Australian dollar rose to its highest since December 2018. REUTERS