Dollar steady after Fed hold leaves rate path murky

The US dollar steadied on Thursday after the Federal Reserve held interest rates as expected while hinting upcoming inflation data would influence future policy moves, leaving investors uncertain about the rates outlook.

The Fed opted to delay any changes to borrowing costs until after next week’s midterm election in a 10-2 decision, which came with an upgraded assessment of an economy that the central bank now says is growing at a “strong pace”.

That, along with the confidence expressed by Fed chair Kevin Warsh that inflation can be lowered to the 2% target without having to “throw sand in the gears” and slow growth or raise unemployment, pushed traders to rein in bets for rate hikes in 2027.

The euro eased 0.15% to US$1.1134 in early Asian hours after the common currency firmed 0.3% in the previous session following the Fed decision. Against the Japanese yen, the dollar was up 0.14% at ¥158.045.

The greenback had held near two-week highs ahead of the announcement but turned lower after Warsh’s press conference offered no clear steer on a December move.

“Warsh’s silence on further rate hikes was interpreted as dovish, or not hawkish enough,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

“Some market participants might have expected him to pair the on-hold decision with a little bit of guidance on the December meeting, but he didn’t do that.”

Traders are pricing in a 78% chance of a hike in December, the FedWatch tool showed. The dollar index, which measures the greenback against a basket of six currencies, was at 102.26.

The Treasury yield curve steepened after Warsh started his press conference, with the 2-year note yield, which typically moves in step with Fed interest rate expectations, falling as low as 4.678%. It was last down 2.3 basis points at 4.712% in Asian hours.

Kerry Craig, global market strategist at JP Morgan Asset Management, said the meeting outcome gave the market and the Fed time to assess upcoming jobs and inflation data.

“The market reaction today was dovish… However, with policy tightening already being priced in, this implies that yields will remain range-bound unless there is a clearer signal for more aggressive policy tightening or a pivot to cuts,” Craig said.

Warsh said on ​Wednesday the central bank would begin setting aside one of its eight regularly scheduled policy meetings next year and ‌two in 2028 to weigh major issues facing the institution and would not use them to consider changes in monetary policy.

“The changing of meeting schedules for 2027 and 2028, where one and two of the eight meetings will discuss strategy not policy changes, respectively, reads as dovish to us,” analysts at TD Securities said in a note. “It may also have the side effect of producing potentially both more extreme and more inter-meeting moves down the line.”

ECB, BOJ decisions loom

Attention now shifts to central bank meetings in Europe and Japan. The European Central Bank will announce its decision later on Thursday, while the Bank of Japan concludes a two-day meeting on Friday. Both central banks are expected to leave interest rates unchanged.

“Barring major hawkish surprises at either of those meetings, we would expect the dollar to continue to consolidate towards the top of recent ranges,” ING analysts said.

The New Zealand dollar stabilised on Thursday at 0.5621 per dollar, after it had slumped as much as 1.7% after the Reserve Bank of New Zealand unexpectedly held interest rates at 2.75%, in a decision that stunned markets.

The Australian dollar was last at US$0.705, hovering near a one-month high.

The Bank of Canada raised its policy rate for the first time in more than three years and said further increases ​might be needed to prevent soaring energy costs from fuelling inflation. The Canadian dollar last bought 1.399 per US dollar.

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