Dollar Falls to 2-Month Low on Fed’s Tightening Cycle Signal, Sterling Hits 15-Month High on Strong Wage Growth
The dollar weakened to a two-month low on Tuesday after Federal Reserve officials signaled that the central bank was nearing the end of its tightening cycle, while the pound hit a 15-month high after pay growth exceeded expectations.
Several Fed officials said on Monday that the central bank would likely need to raise interest rates further to bring down inflation, but that the end to its current monetary policy tightening cycle was getting close.
The comments knocked the greenback to a two-month low of 101.67 against a basket of currencies, as traders pared back their expectations about how much further U.S. rates may have to rise.
U.S. interest rate expectations have been a key driver of the dollar since the Fed began its tightening cycle last year. However, recent signs that inflation may be peaking have led some investors to believe that the Fed may not need to raise rates as aggressively as previously thought.
This view was supported by a survey from the New York Federal Reserve on Monday, which showed that Americans’ near-term inflation expectations have been waning. The survey found that Americans are now expecting the weakest near-term inflation gains in just over two years.
The weaker dollar was a boon for other currencies, including the pound. Sterling hit a near 15-month high of $1.2913 after British wage growth hit a joint record high. The strong wage growth data heaped pressure on the Bank of England to tighten policy further to bring inflation under control.
The yen also strengthened against the dollar, rising 0.6% to 140.455. The yen has been rising in recent weeks as investors have become more concerned about the risk of a recession in the United States. A recession would likely lead to lower interest rates in the U.S., which would make the dollar less attractive to investors.
The euro also rose against the dollar, up 0.1% to $1.1012. The euro has been supported by recent data showing that the eurozone economy is growing at a steady pace.
Overall, the currency market was volatile on Tuesday as investors digested the latest Fed comments and economic data. However, the weaker dollar was a clear trend, as investors bet that the Fed’s tightening cycle is nearing its end.