The U.S. dollar declined on Thursday after the Federal Reserve delivered a policy outlook that was less hawkish than markets expected. The softer tone encouraged investors to short the dollar, as many now anticipate two additional rate cuts next year.
At the end of its two-day meeting, the Fed lowered interest rates by 25 basis points, which was widely expected. However, comments from Chair Jerome Powell during the post-meeting press conference caught some investors off guard. Many had positioned for a stricter message on inflation and policy tightening.
Nick Rees, head of macro research at Monex Europe, said the key takeaway was the “dovish tilt” in both the official statement and Powell’s remarks.
The weaker outlook pushed investors to sell the dollar. As a result, the euro climbed above the key $1.17 mark, trading near a two-month high of $1.1705 in early Asian hours.
The British pound also strengthened, reaching a six-week high of $1.3391. The Japanese yen, which has been pressured by wide interest-rate gaps between Japan and other major economies, gained 0.25% to 155.64 per dollar.
The dollar index dropped to its lowest level since October 21, touching 98.543.
Tony Sycamore, market analyst at IG, noted that many traders expected a repeat of the hawkish tone from the October FOMC meeting. Instead, the latest announcement offered a noticeably different message. He added that T-bill purchases and a less divided voting slate contributed to a more supportive environment for risk assets.
Market expectations for two rate cuts next year were reinforced by Wednesday’s decision, even though the Fed’s own projections point to only one.
The central bank also revealed plans to buy short-term government bonds beginning December 12 to help manage liquidity conditions. The first round will total about $40 billion in Treasury bills.
Bond markets reacted positively. The two-year U.S. Treasury yield fell around 3 basis points to 3.5340%, while the benchmark 10-year yield also declined by 3 basis points to 4.1332%. Bond yields move inversely to prices.
Societe Generale analysts said the earlier-than-expected start to the T-bill program and its size contributed to a strong rally in short-dated Treasuries.
Elsewhere in currency markets, the Australian dollar pulled back from its three-month high and slipped 0.14% to $0.66665. The New Zealand dollar also edged lower, down 0.07% at $0.5812.
