The Fed at the conclusion of its two-day policy meeting lowered rates by 25 basis points as expected, but remarks from Chair Jerome Powell at his post-meeting press conference surprised some who had been positioned for a more hawkish tone.
“For us, the big takeaway was a dovish tilt to the accompanying commentary, and at Fed Chair Powell’s press conference,” said Nick Rees, head of macro research at Monex Europe.
As a result, investors sold the dollar, which in turn pushed the euro above the key US$1.17 level and close to a two-month high of US$1.1705 in early Asia trade on Thursday.
Sterling touched a 1-1/2-month peak of US$1.3391, while the yen, which has recently come under pressure from still-wide interest rate differentials between Japan and the rest of the world, rose 0.25% to 155.64 per dollar.
Against a basket of currencies, the dollar fell to its lowest since October 21 at 98.543.
“I think most were looking for a rerun of the same hawkish sentiment which we saw in that October FOMC meeting. But this has certainly a different tone about it, the commentary’s different, the T-bill buying supportive, the vote certainly wasn’t as hawkish as everybody expected,” said Tony Sycamore, a market analyst at IG.
“This is, for me, the green light for risk assets to rally into year-end.”
Wednesday’s outcome reinforced market expectations for two more rate cuts next year, against the Fed’s median expectation for a single quarter-percentage-point cut next year.
The central bank also announced that it would start buying short-dated government bonds to help manage market liquidity levels beginning Dec 12, with the initial round totaling around US$40 billion in Treasury bills.
That kept bonds supported, with the two-year US Treasury yield falling about 3 bps to 3.5340%. The benchmark 10-year yield was similarly down 3 bps to 4.1332%. Bond yields move inversely to prices.
“The earlier start and size of the T-bill purchases surprised investors, leading (to) a meaningful rally led in Treasuries by the front-end,” said analysts at Societe Generale in a note.
In other currencies, the Australian dollar retreated from a roughly three-month top hit in the previous session and was down 0.14% to US$0.66665. The New Zealand dollar eased 0.07% to US$0.5812.