The dollar slipped against major currencies on Thursday, as the U.S. Federal ReserveFederal Reserve opened the door to a pause in its aggressive tightening cycle, but markets were buffeted by risk aversion amid a rout in regional U.S. bank shares.
The Fed on Wednesday raised its benchmark overnight interest rate by a quarter of a percentage point, as expected, but in doing so dropped from its policy statement language that it anticipates further rate increases would be needed.
This sent the U.S. dollar down widely and Treasuries' yields sliding, with traders taking the comments as a signal for a peak in U.S. rates had been reached and moved to price in rate cuts later this year. On Thursday, the British pound was at an 11-month high of $1.2590, having reached that level in the previous session.
The euro was up 0.2% to $1.1083, flirting with its recent one-year peak.
The most notable part of the statement was the section outlining the outlook for policy going forward, as the FOMC watered down its language regarding the need for additional monetary tightening, said Jay Bryson, chief economist at Wells Fargo.
The Federal Reserve may be necessary to tighten but the FOMC does not appear to be pre-committing to another rate hike on June 14. The dollar index was down 0.12% to 101.11, after losing more than 0.6% in the previous session.
The Fed is expected to keep interest rates steady at its next June meeting, and have priced in about 80 basis points of rate cuts beginning July through to the end of the year.
Moreover, lingering fears of a banking sector turmoil were lingering fears that the Fed will soon have to begin easing monetary conditions, intensified by news that PacWest Bancorp is exploring strategic options, sending its shares and those of other U.S. regional lenders tumbling in after-market trading.
The Los Angeles-based lender is hoping to avoid the fate of other regional lenders taken over by U.S. regulators in the past two months, a source told Reuters.
The Japanese yen, a traditional safe-haven in times of market instability, has been well supported, with the currency pushing up just over 0.1% against the U.S. dollar to 134.51.
It had surged more than 1% to close at a record 1% on Wednesday, boosted by a slide in U.S. Treasury yields.
The risk-sensitive Australian and New Zealand currencies also fell in Asia trade, with the Aussie down 0.32% to $0.6649.
The kiwi was up 0.1% at $0.62235, compared to a year ago.
The banking sector and the crunch on credit are causing a lot of concern in the U.S. This is a credit event and that feeds through to the economy quite quickly, said Jarrod Kerr, chief economist at Kiwibank.
So I think central banks, including the Fed, are at or very near the peak in their cash rates. The European Central Bank ECB comes under the spotlight next, where expectations are for ECB policymakers to raise interest rates for the seventh meeting in a row later on Thursday.