Dollar Dips as Fed Sticks to Rate Cut Plan, Aussie Soars on Strong Jobs Data

21 Mar 2024 , 10:15 AM

On Thursday, the U.S. dollar experienced broad declines following the Federal Reserve’s decision to uphold its interest rate cut projections for the year, despite unexpected inflationary spikes, without adopting a more hawkish stance as some investors had anticipated.

The Australian dollar surged after robust employment data for February revealed a sharp rebound and a significant drop in the jobless rate, indicating a resilient labor market. The Aussie advanced by 0.33% to $0.6608, peaking at $0.6615, its highest level in a week, post the release of the upbeat jobs report.

Federal Reserve Chair Jerome Powell, in the aftermath of Wednesday’s policy meeting, emphasized that recent inflationary readings hadn’t altered the overarching narrative of gradually moderating price pressures in the U.S. This reiterated the central bank’s commitment to three rate cuts this year, even with slightly slower progress on inflation. Consequently, the greenback depreciated as traders swiftly reinstated expectations of a Fed easing cycle commencing in June, with the CME FedWatch tool now indicating a 75% likelihood of a rate cut that month, up from 59% the previous day.

Major currencies such as the euro and sterling soared to one-week highs against the dollar, reaching $1.09375 and $1.2798, respectively. Seema Shah, Chief Global Strategist at Principal Asset Management, noted that Powell’s stance suggested a strong preference for a soft landing, signaling that significant factors would be necessary to prevent rate cuts rather than to initiate them.

The dollar index remained steady at 103.23, following a decline of over 0.5% in the previous session. Attention shifted to the Bank of England’s rate decision later in the day, with expectations of the central bank maintaining rates unchanged despite a slowdown in British inflation in February.

In other currency movements, the New Zealand dollar edged up by 0.08% to $0.6087, although gains were limited by data revealing a slight contraction in New Zealand’s economy in the fourth quarter, pushing the country into a technical recession. Meanwhile, the yen strengthened by 0.4% to 150.63 against the dollar, rebounding from a four-month low, as investors reacted to the Bank of Japan’s indication of prolonged accommodative financial conditions. The yen carry trade regained traction due to persistent interest rate differentials between Japan and the U.S., with expectations for the yen to remain under pressure until a shift in Fed policy, as highlighted by Charu Chanana, Head of FX Strategy at Saxo.