SINGAPORE – The dollar fell after Federal Reserve Chair Jerome Powell struck a moderately dovish stance, contrary to market expectations, saying that given how credit conditions have tightened, the US central bank may not need to raise interest rates as much.
A pause in negotiations to raise the federal government’s $31.4 trillion debt ceiling also pressured the dollar.
But it was Powell who caught the market by surprise.
Tighter credit conditions mean that “our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” Powell said at a central bank conference in Washington.
The Fed chief reiterated that the central bank would now make decisions “meeting by meetin,” but also flagged that after a year of aggressive rate increases, officials can afford to make “careful assessments” of the impact of rate hikes on the economic outlook.
“Powell was not overtly dovish, but he definitely was not hawkish,” said Erik Bregar, director, FX & precious metals risk management, at Silver Gold Bull in Toronto.
“So you’re seeing bond market cover hawkish bets, same thing with FX. This derails upside momentum in the dollar going into the weekend.”
Fed officials this week have more or less pushed against rate-pause bets for June given persistently high inflation.
Following Powell’s comments, the rate futures market has priced late on Friday a roughly 16 percent chance that the Fed raises the benchmark rate at its June meeting by 25 basis points. The rate-hike bet was nearly 40 percent before the Fed chairman spoke.
The dollar index fell 0.4 percent to 103.08, after hitting seven-week peaks the previous session. On the week, the dollar posted a 0.6 percent gain. – Reuters
