Dollar dips as Fed cites disappointing inflation, but keeps focus on cuts

FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Karen Brettell

NEW YORK (Reuters) – The dollar fell on Wednesday after the U.S. Federal Reserve signaled it is still leaning toward eventual reductions in borrowing costs, but repeated that it wants to gain “greater confidence” that inflation will continue to fall before cutting rates.

“In recent months, there has been a lack of further progress towards the Committee’s 2% inflation objective,” the Fed said in its statement.

The statement was largely as expected while Fed Chair Jerome Powell also said at a press conference that it is unlikely that the U.S. central bank’s next move will be a hike, easing some concerns about the Fed potentially pivoting to a more hawkish stance.

Stickier-than-expected consumer price inflation in March dashed hopes that elevated readings in January and February were anomalies, leading traders to push back expectations on when the U.S. central bank is likely to cut interest rates.

Fed fund futures traders are now pricing in 35 basis points of easing this year, up from 29 basis points before the Fed statement.

“The lack of change in forward guidance (still implying the Fed sees the next move as a cut – dependent on inflation) was marginally dovish, and I am not sure the new inserted phrase about lack of progress on inflation is enough to offset that,” said John Velis, FX and macro strategist at BNY Mellon in New York.

The dollar index fell 0.44% at 105.85, after earlier reaching 106.49, the highest since April 16. A break above the 106.51 would be the highest since early November.

The Fed also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25 billion in Treasury bonds to run off each month versus the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion monthly.

“The fact that the Fed is tapering a little bit more tells me they want to start easing conditions. They don’t want to add to the tightness,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

The next major economic indicator will be Friday’s jobs report for April, which is expected to show that employers added 243,000 jobs during the month.

The ADP Employment report on Wednesday showed that U.S. private payrolls increased more than expected in April while data for the prior month was revised higher.

A U.S. Labor Department report on Wednesday, meanwhile, showed that U.S. job openings fell to a three-year low in March, while the number of people quitting their jobs declined.

The euro gained 0.5% to $1.0718. The pound strengthened 0.34% to $1.2532.

The dollar fell 0.33% to 157.28 yen.

The Japanese currency rallied sharply on Monday, with traders citing yen-buying intervention by Japanese authorities to try to underpin a currency languishing at levels last seen over three decades ago.

The dollar has since crept higher, raising questions on whether additional steps will be needed to stop further yen weakness. The Japanese currency is suffering from a wide interest rate differential that makes borrowing in the yen and investing in U.S. assets attractive.

“There aren’t many options for Japan. In one way, intervention is just an invitation to buy the dip for most FX traders at better levels,” said Adam Button, chief currency analyst at ForexLive in Toronto. “Dollar/yen will not stop climbing until the U.S. economy cools off.”

In cryptocurrencies, bitcoin fell 1.97% at $58,683.79 after earlier reaching $56,483, the lowest since Feb. 27.

(Reporting By Karen Brettell; Additional reporting by Laura Matthews and Chibuike Oguh in New York; editing by Barbara Lewis and Will Dunham)