Fed officials said they would raise interest rates in March, but spoke cautiously about what might follow and indicated a desire to keep options open given an uncertain inflation outlook
The dollar dropped for a second straight session on Tuesday, after hitting a 19-month peak at the end of last week, on weaker-than-expected U.S. economic data and after Federal Reserve officials pushed back against aggressive rate hikes this year, lifting risk appetite.
As the dollar eased, risk-sensitive currencies such as the Australian dollar, euro, and British pound gained.
After dropping nearly 5% in January, world equities started February slightly firmer and currency markets have also changed course.
A chorus of Fed officials said on Monday they would raise interest rates in March, but spoke cautiously about what might follow and indicated a desire to keep options open given an uncertain inflation outlook.
Philadelphia Fed President Patrick Harker was equally cautious on Tuesday as he pushed back on a rate increase of half a percentage point in March, saying he would have to be convinced it was needed.
Louis Navellier, chief investment officer at Navellier and Associates said the latest remarks revived “the belief that the ‘Fed put’ was still alive,” referring to the tendency of the Fed to ease monetary policy, or push back the timeline on raising rates, in response to falling stock markets.
In addition, as the Fed sought to put brakes on faster rate hike forecasts, central banks around the world have either raised their policy rates already or flagged their own tightening plans.
Given that yield differentials have shifted further in favour of the U.S. in that period, the greenback’s failure to make further headway is somewhat perplexing, wrote Jonas Goltermann, senior markets economist, at Capital Economics.
But the key factor is probably that the most recent shift in the Fed’s stance has been broadly matched by other advanced economy central banks, Goltermann wrote.
Central banks in Norway, New Zealand, and Britain have already tightened their policy rates and signalled further hikes are coming.
U.S. rate futures late on Tuesday have slightly pulled back on faster rates hikes, pricing about less than five hikes this year, starting in March. A 50 basis-point rate increase showed a roughly 16% probability, down from as high as 32% late last week, according to Refinitiv data.
In afternoon trading, the dollar index fell 0.3% to 96.423, after hitting a 19-month high last week.
U.S. manufacturing data on Tuesday came in below expectations and added to the dollar’s losses.
A measure of U.S. manufacturing activity fell to a 14-month low in January, dropping to a reading of 57.6 from 58.8 in December amid an outbreak of COVID infections. U.S. construction spending was also less than forecast, down 0.2%.