May 4 (Reuters) – SINGAPORE. On Thursday, the dollar weakened against most major currencies as the Federal Reserve hinted at a break in its rapid tightening cycle. However, risk aversion swept the markets in the wake of a collapse in regional U.S. bank shares, causing a selloff across the board.
On Wednesday, as predicted, the Federal Reserve increased its benchmark overnight interest rate by a quarter of a percentage point. However, the statement accompanying the rise no longer included the word “anticipates” to indicate that future rate hikes were anticipated.
As a result, the U.S. dollar dropped across the board and Treasury yields fell after the decision, as traders saw the comments as a hint that the peak in U.S. rates had been achieved and began pricing in rate reduction for the second half of the year.
Euro gains of 0.19% sent it to $1.1082, just over its previous one-year high, while the British pound jumped 0.2% to $1.25905, a level not seen in around 11 months.
Because of a holiday, Japanese markets will not open today.
Wells Fargo’s senior economist Jay Bryson said the section of the statement defining the outlook for future policy “the most notable part,” as the FOMC softened its rhetoric emphasising the need for continued monetary tightening.
Although “further tightening” could be required, “the FOMC does not appear to be pre-committing to another rate hike on June 14,” as the article puts it.
Following a loss of almost 0.6% the previous session, the U.S. dollar index recently traded at 101.09, down 0.14 points.
Current market pricing indicates a somewhat greater than 10% possibility that the Fed will begin decreasing rates in June, with an expected total of around 80 basis points in rate reductions by year’s end.
Fears of banking sector turbulence have persisted, and recent reports that PacWest Bancorp is weighing its strategic alternatives have only added to the consensus that the Fed will soon have to begin relaxing monetary conditions. A number of possible partners and investors have contacted the Los Angeles-based lender, it has been reported.
PacWest’s stock price, along with that of other regional banks in the United States, fell sharply in Wednesday’s extended trading session.
The Japanese yen, which is seen as a safe haven in times of market volatility, gained approximately 0.1% against the US dollar, closing at 134.56. This was due to investors’ reluctance to take on further risk.
U.S. Treasury rates falling helped it rise by over 1% on Wednesday.
The ones who are afraid of taking chances At the end of Asian session, the Australian dollar was at $0.6692 and the New Zealand dollar was at $0.6249, both representing gains of around 0.3% from their respective opening levels.
“The banking industry and the credit crisis have generated widespread anxiety in the United States. In the words of Kiwibank’s chief economist, Jarrod Kerr: “This is a credit event and that feeds through to the economy quite quickly.”
Accordingly, “I believe central banks, including the Fed, are at or very near the peak in their cash rates.”
Afterwards on Thursday, all eyes will be on the European Central Bank (ECB), where officials are widely anticipated to increase interest rates for the seventh consecutive meeting.
