Dollar slides as Powell rules out rate hikes

The US dollar slipped against all its major counterparts yesterday, losing the most ground against the Japanese yen, with dollar/yen closing the day slightly more than 2% down.

Responsible for the dollar’s retreat was the Fed. The Committee decided to keep interest rates unchanged as was widely expected and, although officials expressed concerns about the lack of progress towards their inflation objective, the forward guidance was not changed.

At the press conference, when asked about the possibility of resuming rate hikes, Chair Powell clearly said that it is unlikely that the next move will be a hike, adding that policy is well positioned to address different paths the economy might take, among which there are paths that warrant rate cuts.

Combined with the announcement to slow the speed of balance sheet drawdown by more than expected, this may have disappointed those expecting a more hawkish outcome, leading the market to believe that the Fed is still leaning towards cutting interest rates at some point this year. Indeed, alongside the US dollar, Treasury yields also pulled back, while according to Fed funds futures, investors are now penciling in 35bps worth of cuts from around 30 ahead of the meeting.

A couple of hours after the Fed decision, the yen skyrocketed, with dollar/yen dropping to 153.00 from around 157.55, prompting traders to suspect another round of intervention by Japanese authorities.

Although Japan’s vice finance minister Kanda refrained from commenting on whether they have indeed stepped into the market when he was asked, this appears to be the second attempt this week to prop up the yen, with the first taking place on Monday after the yen slipped past the 160 per dollar level.

Having said all that, the yen is pulling back again today, remaining more than 10% down against the dollar this year, driven by diminishing Fed rate cut bets and by a BoJ that’s been constantly disappointing hawkish expectations.

Just on Friday, the Bank refrained from providing clear signals on whether another rate hike may be warranted soon, disappointing those expecting a summer action. Thus, for a yen recovery to be sustained, intervention on its own may not be enough. The BoJ might need to change the tone of its language as well.

On Wall Street, all three major indices gained after the Fed decision allowed investors to maintain hopes that borrowing costs will be eventually lowered. However, only the Dow Jones secured some gains, with both the S&P 500 and the Nasdaq closing the session in the red.

Perhaps investors remained cautious ahead of Friday’s nonfarm payrolls as another strong report could convince the Fed to wait even longer before it starts examining whether and when interest rates need to be cut.

Another reason why investors are not so excited to increase their risk exposures may be the disappointing results by firms relating to artificial intelligence. The stock of Super Micro Computer (SMCI), one of the vendors that build Nvidia-based servers, tumbled after the firm’s revenue miss, while Advanced Micro Devices (AMD) announced disappointing chip sales forecasts, with its stock falling as well.