Forex – Dollar Steady After Fed's Dovish Turn; Brexit Fear Hits Sterling

© Reuters. — The dollar is steadying early Thursday after falling sharply as the Federal Reserve all but swore off raising interest rates again this year – a swing that could signal the end of the whole policy tightening cycle.

“The Fed’s concerns over the future inflation path are clearly stronger than anticipated and it seems that the hiking cycle really is now over,” said Lee Ferridge, head of multi-asset strategy, the Americas at State Street Global Markets.

The , which measures the greenback against a basket of six major currencies, lost over half a percent in reaction to the news, but it recovered during Asian trading hours and at 04:00 AM ET (0800 GMT), it stood at 95.412, down around 0.5% from its level before the announcements. The was at $1.1422, just off a six-week high of $1.1438, while against the , the dollar fell to a new five-week low of 110.36.

The Fed’s updated ‘dot-plot’ which reflects the path of interest rates expected by individual policy-makers, now implies no further rate hikes in 2019, and only one in 2020. The Fed also indicated that it would end its policy of balance sheet reduction – so-called ‘quantitative tightening’ – in the second half of this year.

The degree of concern about the health of the economy implicit in the announcement took markets by surprise, coming so soon after repeated assurances by Chairman Jerome Powell and others that the economy was “in a good place”.

But data from around the world have indicated a broad slowdown this year in the shadow of the U.S.-China trade conflict, an issue that seems no closer to resolution after President Donald Trump said on Wednesday that he intends to leave on Chinese imports in place for a “substantial period” and voiced doubts about China’s compliance with any deal that could be struck in the near term.

The dollar’s losses were moderated by the realization that many of the world’s other central banks could follow it in adopting a looser policy stance. Some, such as the and the , have already dialled back their expectations for policy tightening as the economy has slowed (not least due to the approach of Brexit). The Bank of England’s is due to meet later in the day.

“Two months ago, the Fed’s dovish turn was followed by dovish turns elsewhere, keeping the ‘policy expectations gap’ relatively stable,” said John Velis, FX and macro strategist with BNY Mellon. “While not dollar positive, (this week’s) meeting might not ultimately be dollar negative for the same reasons.”

The fear of a disorderly Brexit has returned to European markets after a speech from Prime Minister Theresa May late Wednesday which outlined no options other than the Withdrawal Agreement that has twice been rejected by parliament, or a ‘no-deal’ Brexit in eight days’ time. Her request for a three-month extension to the March 29 deadline will be considered at an EU summit later Thursday. However, reports suggest that getting the necessary unanimous agreement from the other 27 leaders will be difficult.

The was at $1.3186, as May’s speech almost completely reversed the spike that followed the Fed’s decision. Against the , the pound slid to near a four-week low at 1.1541.

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