Investors watched hawkish comments from Federal Reserve officials as sterling fell.
The US dollar performed strongly in the foreign exchange market, as US Treasury yields rose.
Investors watched aggressive comments from Federal Reserve officials, while sterling fell on general public disappointment over the latest UK government budget.
The dollar has rallied somewhat after falling in recent weeks, as inflation data, as well comments from Fed officials, boosted bets that the US central bank may soon slow its interest rates hikes.
However, during an event on Thursday, St. Louis Fed President James Bullard held up a chart suggesting that even dovish assumptions would require the central bank’s policy rate to rise to at least around 5%.
Some stricter forecasts suggest that said rate would be above 7%. The fed funds rate is currently in the 3.75%-4.00% range, after a series of aggressive hikes.
The Dollar and the Euro in Opposite Directions
Joe Perry, senior market analyst at FOREX.com and City Index in New York, told Reuters that Fed Chairman Jerome Powell’s approach remains firm, so further increases are expected in the short term. While he expects the dollar to go lower over the longer term, Perry sees the “opportunity for a bounce to 109.25 or so on the dollar index, to then turn around and continue lower.”
Perry also commented that the Euro presents a trend contrary to the dollar’s, so it is expected that it will fall in the short term, and then rise, as the current monetary policy measures calm down.
Bullard spoke a day after San Francisco Fed President Mary Daly, until recently one of the most dovish of its officials, raised doubts about a central bank change of direction, by saying a pause was off the table.
Sterling Slowly Sinks
Brad Bechtel, global head of FX at Jefferies, described Bullard’s presentation as “relatively aggressive,” and also noted that the gain in US Treasury yields was also helping the dollar on Thursday.
Also noting sterling’s move on Thursday, Bechtel said investors were worried about UK Chancellor Jeremy Hunt’s budget, which included tax increases and tighter government spending, aimed at cooling inflation and thus restoring the economic reputation of the country.
“The budget had some holes in it and it wasn’t that impressive from a markets standpoint,” Bechtel said. “They are plugging a hole by hitting the consumer. You have a failing economy and a cost of living crisis, and taxes are going up.”
Sterling fell 0.53% to $1.1850, after falling as much as 1.25% to $1.17645.
The dollar index, which measures the dollar against six major pairs, recently rose 0.38% to 106.687. After hitting a 20-year high in late September, the index had lost more than 8% when it touched its most recent low on Tuesday.
By Audy Castaneda