SINGAPORE - Reuters - The dollar was on the back foot on Thursday, even as the Federal Reserve kept its hawkish rhetoric after raising rates by half a percentage point, as investors were doubtful about how much the central bank would commit to putting the brakes on growth to curb inflation.
Fed Chair Jerome Powell said overnight that the Fed will deliver more interest rate increases next year despite a possible recession in the U.S. with rates expected to peak above 5%.
The pound and the euro were near their six month highs in early Asia trade on Thursday after having touched those levels in the previous session.
The pound was 0.1% lower at $1.2415 last night, after a 0.5% overnight gain, while the euro fell 0.09% to $1.0673, having risen 0.5% overnight.
The kiwi fell 0.05% to $0.6456, though it was not far off the six month peak of $0.6513 it hit this week.
Although the dollar had gained a boost in the immediate aftermath of the Fed's widely anticipated 50 basis point rate rise and Powell's speech, it later reversed some of those gains as markets contemplated the darkening growth outlook in the world's largest economy.
The 50 bp increase was a downshift after four consecutive 75 basis point rate hikes.
The U.S. dollar index was 0.02% higher against a basket of currencies, after touching a six month low in the previous session.
Christian Hoffmann, portfolio manager and managing director at Thornburg Investment Management, said that the Fed does not want financial conditions to be relaxed, but increasingly investors are saying that we know what you are saying and we know what you want, but we don't believe you.
Markets are expecting U.S. rates to peak just under 5% by May of next year, according to Fed funds futures.
The belief that inflation has likely peaked is fuelling market scepticism that the Fed may not take rates to such a restrictive level as it has set out.
Consumer prices in the United States fell less than expected for a second straight month in November, with consumer prices moving by the least in 15 months, according to data released this week.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, said markets probably support that view as well, because of the fact that the funds rate won't be kept at that restrictive level for that long. The US economy is going to deteriorate and probably contract modestly next year, and that will encourage the FOMC to reverse course later next year. The Aussie was last 0.05% lower at $0.6860, while the dollar fell 0.06% against the Japanese yen to 135.40.
The Bank of England and the European Central Bank ECB are expected to deliver a 50 basis point rate hike on Thursday, with investors turning their attention to rate decisions by the Bank of England and the European Central Bank on Thursday.
The Bank of England and the ECB are facing many challenges. Jarrod Kerr, chief economist at Kiwibank, said that their economies are going to struggle next year. They need to be more cautious about their outlook and the softer economies. In New Zealand, the economy saw surprisingly strong growth in the third quarter, but signs of an imminent slowdown are beginning to appear, due to high interest rates and falling housing prices.