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Sunday, June 11, 2023  
21 Dhul-Qadah 1444  

Dollar slides after Fed signals pause; banking woes dent confidence

The Fed on Wednesday raised its benchmark overnight interest rate
<p>U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS</p>

U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS

SINGAPORE: The dollar fell against most major currencies on Thursday after the U.S. Federal Reserve opened the door to a pause in its aggressive tightening cycle, though markets were buffeted by risk aversion amid a rout in regional U.S. bank shares.

The Fed on Wednesday raised its benchmark overnight interest rate by a quarter of a percentage point, as expected, but in doing so dropped from its policy statement language that it “anticipates” further rate increases would be needed.

That sent the U.S. dollar broadly lower and Treasury yields sliding following the decision, with traders taking the comments as a signal for a peak in U.S. rates had been reached and moved to price in rate cuts later this year.

In thinned Asian trade on Thursday, the British pound rose 0.2% to a roughly 11-month high of $1.25905, while the euro gained 0.19% to $1.1082, flirting with its recent one-year peak.

Markets in Japan remain closed for a holiday.

“The most notable part of (the) statement was the section outlining the outlook for policy going forward, as the FOMC watered down its language regarding the need for additional monetary tightening,” said Jay Bryson, chief economist at Wells Fargo.

“Additional tightening may be needed … but the FOMC does not appear to be pre-committing to another rate hike on June 14.”

The U.S. dollar index was last 0.14% lower at 101.09, after dropping more than 0.6% in the previous session.

Money markets are now pricing in a slightly more than 10% chance the Fed will begin cutting rates in June, and expect roughly 80 basis points of rate cuts through to the end of the year.

Adding to expectations the Fed will soon have to begin easing monetary conditions were lingering fears of a banking sector turmoil, intensified by news that PacWest Bancorp (PACW.O) is exploring strategic options. The Los Angeles-based lender said it has been approached by several potential partners and investors.

Shares of PacWest and several other U.S. regional lenders had tumbled in after-market trading on Wednesday.

The cautious risk sentiment kept the Japanese yen - a traditional safe haven in times of market turmoil - well supported, with the currency pushing up about 0.1% against the U.S. dollar to 134.56.

It had jumped more than 1% on Wednesday, boosted by a slide in U.S. Treasury yields.

The risk-sensitive Australian and New Zealand dollars reversed their earlier losses over the course of the Asian trade, with both currencies last up about 0.3% each to $0.6692 and $0.6249, respectively.

“There are a lot of concerns in the U.S. around the banking sector and the crunch on credit. This is a credit event and that feeds through to the economy quite quickly,” said Jarrod Kerr, chief economist at Kiwibank.

“So I think central banks, including the Fed, are at or very near the peak in their cash rates.”

The European Central Bank (ECB) comes under the spotlight next, where expectations are for ECB policymakers to raise interest rates for the seventh meeting in a row later on Thursday.

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United States Federal Reserve



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