US Dollar weakens marginally after US Federal Reserve keeps interest rate unchanged

13 Jun 2024 , 08:15 AM

Amidst softer-than-expected U.S. inflation, Asian currencies held steady versus the dollar on Thursday. However, the yen continued to weaken ahead of a Bank of Japan meeting, and U.S. policymakers hinted that interest rates would stay high for some time to come. US Federal Reserve kept its benchmark interest rate unchanged, in its monetary policy meeting yesterday.

The euro surged 0.6% during the course of the night and broke above its 200-day moving average, closing at $1.0811. The New Zealand dollar shot to a five-month high above $0.62 before ending at $0.6183, while the Australian dollar increased by 0.9% to $0.6662. The yen increased, but not by much—just 0.2%.

Following the release of the U.S. inflation report, which revealed that consumer prices were stable month over month in May despite market predictions of a 0.1% rise.

They were scaled back when the Federal Reserve decided to maintain the funds rate at 5.25–5.5%, and the median estimate of policymakers for the number of cuts this year dropped from three in March to only one.

Overnight, sterling increased by 0.5% to $1.2798. Trade in Asia saw only moderate morning movements, although depreciating currencies like the Indonesian rupiah were probably about to see some relief.

Markets continued to price in nearly two 25 basis point rate cuts this year despite the Fed’s estimates.

Early offshore activity saw the Chinese yuan remain stable at 7.2627, having slightly appreciated against the dollar overnight.

In his press conference, Fed Chair Jerome Powell adopted a familiar tone and emphasised that policymakers will be attentive to economic data. Less cuts were anticipated for this year, but they were pencilled in by authorities for 2025 or 2026.

Even so, it was chilly comfort for the yen, which is fighting against a downward trend given the huge difference between short-term U.S. rates that are significantly higher and Japanese rates that are around zero.

The markets are anticipating a statement or signal that the Bank of Japan will be reducing its enormous bond purchases in order to permit further increases in Japanese rates, as the bank wraps up a two-day policy meeting this Friday.

The yen is thus exposed to disappointment. It was recently erratic at 156.82 to the dollar and weak against crosses, where it fell to an overnight low of 97.06 per kiwi, the lowest level in 17 years, and 200.91 on sterling, the lowest level in 16 years.

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