Dollar rebounds as investors buy post-Fed dip

The dollar rebounded on Thursday, recovering after the Federal Reserve repeated it saw high inflation as transitory while all eyes were on the Bank of England which could become the first major central bank to raise rates since the COVID-19 crisis

The Fed announced on Wednesday a $15 billion monthly cut to its $120 billion in monthly purchases of Treasuries and mortgage-backed securities, but Chairman Jerome Powell said he was in no rush to hike borrowing costs

The move was initially seen as favourable to risky assets, with Wall Street indexes closing at record highs while the safe-haven dollar fell sharply against a basket of major currencies

Gradually, however, investors took a more balanced view of the Fed monetary policy update and the overall picture painted by fresh upbeat data for the U.S. services industry

The dollar index swung back from a low of 93.80 points shortly after the Fed announcement on Wednesday to 94.25 points at 0800 GMT on Thursday, its highest since Monday

“I think most people would have been looking for a dip to buy dollar,” said Kit Jukes, a macro strategist at Societe Generale

The euro, he noted, remained under pressure against the dollar with the European Central Bank seemingly far behind the Fed in tightening

ECB President Christine Lagarde on Wednesday pushed back on market bets for a rate hike as soon as next October and said it was very unlikely such a move would occur in 2022

The euro fell against the dollar on Thursday, down 0.5% at $1.1578

Sterling, which had initially led the gains on the dollar after the Fed, was down 0.3% at $1.3644 while investors waited to see whether Bank of England policy makers would announce a first post-pandemic interest rate hike

Minutes of the BoE’s Monetary Policy Committee meeting are due at 1200 GMT

Markets are pricing in a rate rise from the BoE, but economists polled by Reuters said the move was too close to call, as Britain, like much of the world, grapples with balancing rate rises to combat inflation without compromising the economic recovery

Elsewhere, the yen was just slightly lower with one dollar at 113.98 yen within a good leap of the dollar’s multiyear high of 114.69 yen hit last month

The Aussie dollar lost 0.26% at $0.7430, close to the levels it fell to on Tuesday after the Reserve Bank of Australia adopted a dovish tone at its key meeting