The Fed raised its benchmark funds rate by 25 basis points, as expected, but dropped language about "ongoing increases" being needed in favour of "some additional" rises, as it watches how wobbling confidence in banks affects the economy. Futures imply around a 40% chance of one more quarter-point hike, in contrast to Europe where markets see just under 50 bps of further tightening.
The gap has sent the euro surging to a seven-week high of $1.0930, having also risen for six straight sessions. Sterling also hovered near a seven-week high after data showed a surprise rise in British inflation, leaving it at an eye-watering 10.4% and heaping pressure on the Bank of England to raise rates and sound hawkish at its meeting later on. Markets have priced in a 25-bp hike from the BoE. Traders also expect a 50-bp hike from the Swiss National Bank, which has the franc recovering from a slide it suffered as troubles at Credit Suisse unsettled traders. Norway's central bank is seen raising rates by 25 bps to 3% to curb inflation and prop up a weakening currency, which last weak touched its weakest level against the euro since May 2020.
The shift in tone from the Fed makes it less likely that markets go back to worrying that strong economic data drives rates higher, said NatWest Markets head of G10 FX strategy Brian Daingerfield. "From the foreign exchange perspective, we think that argues for further dollar weakness as the ceiling for the Fed cycle has clearly come down." The dollar index, which measures the currency against six major peers, was last down 0.3%, on track for its sixth straight daily drop, its longest such streak since September 2021.
The dollar had found a footing when U.S. Treasury Secretary Janet Yellen spooked markets on Wednesday by telling Congress she has not considered or discussed blanket bank deposit insurance. But that mostly reversed in Asia. The Australian and New Zealand dollars rose 0.8% and 1% respectively. Dollar/yen, which closely follows U.S. yields, fell 0.5% to a six-week low of 130.41. Two-year U.S. Treasury yields fell 4 bps, extending a drop of about 20 bps on Wednesday. Financial markets have been roiled by wavering confidence in banks globally following a run on Silicon Valley Bank two weeks ago and the sudden demise of Credit Suisse. The focus on the banking front is now primarily on U.S. regional lenders where worry of a contagious run on deposits remains elevated. Fed Chair Jerome Powell said deposit flows have stabilised in the last week, and smaller lenders said they took some comfort from Yellen's remarks that deposit insurance would be considered were there to be a contagion risk. That "took the anxiety out of the room," according to Daniel Kimbell, an executive at the local Passumpsic Bank in St Johnsbury, Vermont. Regional lenders' shares, however, fell. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Tom Westbrook in Singapore, additional reporting by Samuel Indyk in London; Editing by Simon Cameron-Moore, Sonali Paul and Emelia Sithole-Matarise)
