FOREX-Dollar falls as Fed says inflation recovery turns corner

SINGAPORE Reuters - The dollar fell after the U.S. Federal Reserve said it had turned a corner in the fight against inflation, giving markets confidence that the end of its rate-hike campaign is near.

The Fed Chair Jerome Powell said on Wednesday that the disinflation process has started in the world's largest economy, but he also signalled that interest rates would continue to rise and that cuts were not in the offing.

The central bank's acknowledgment of slowing inflation was made on Wednesday by the Fed's statement after the end of its two-day policy meeting where policymakers agreed to raise rates by 25 basis points.

The dollar fell to a new nine month low of 100.80 after Powell made remarks, and against a basket of currencies.

It was down by 0.12% to 100.83 last week, having fallen more than 1% on Wednesday.

Ray Attrill, head of FX strategy at National Australia Bank NAB Powell said it was a relief that there was nothing there that really challenged the market's view, but that doesn't dissuade the market from saying that some time might be six months, rather than two years. After rallying 1.2% in the previous session, the Aussie jumped to a new eight-month high of $0.7158 in early Asia trade on Thursday.

The dollar fell 0.55% against the Japanese yen to 128.21.

The kiwi, which has jumped more than 1% on Wednesday, was last 0.25% higher at $0.6523.

With the Fed out of the way, the stage is set for the Bank of England BoE and the European Central Bank to announce their rate decisions later on Thursday, where expectations are for a 50 bp hike from each.

The euro was up to a roughly 10 month peak of $1.1034 on Thursday after gaining 1.2% in the previous session, while sterling was last 0.19% higher at $1.2399.

The risk is that we get a hawkish 50 from the ECB and a dovish 50 from the Bank of England, which could cause some volatility, said NAB's Attrill.

Euro zone inflation eased for the third month in January, but there was little relief for the ECB as underlying price growth held steady, and concerns have already been raised about the reliability of the figures, according to data released on Wednesday.

I don't think that's going to affect the message from the ECB, which I think is still going to be that they've got a lot to do, Attrill said.

Friday's nonfarm payrolls report will be the next test of the Fed's fight against inflation, although Wednesday's JOLTS report showed that job openings unexpectedly rose in December, pointing to a still tight labour market.

Markets are expecting the Fed funds rate to peak just under 4.9% by June, compared to earlier expectations of a peak of just below 5%.