Dollar declines after Fed cuts rates; Sterling, Aussie, and Norwegian Krone lead

Dollar falls post-Fed: The US Dollar experienced a decline on Thursday following the Federal Reserve's decision to cut interest rates by 50 basis points and adjust its monetary policy forecast. This led to notable gains for the British pound, the Australian dollar, and the Norwegian krone against their counterparts.

Prior to the Fed's announcement on Wednesday, expectations had leaned towards a dovish outcome, with money markets pricing in a 65 per cent likelihood of a 50 basis point cut. Reuters-polling economists had anticipated a 25 basis point reduction.

Fed’s dovish impact

Lefteris Farmakis, a forex strategist at Barclays, commented, "The Fed's dovish stance is likely to support a rebound in risk sentiment and contribute to further short-term weakness in the US dollar." He added, "However, the Fed's current easing cycle suggests significant future dollar weakness may be limited."

Markets are now pricing in an additional 70 basis points of rate cuts in 2024 and 191 basis points by September 2025.

The dollar index, which tracks the greenback against a basket of six major currencies, fell 0.33 per cent to 100.68. It had dropped to a yearly low of 100.21 in the previous session.

Guy Stear, head of developed markets strategy at the Amundi Investment Institute, noted, "The Fed's trimming of growth forecasts and sharp downward revision of its projections reflect confidence in its fight against inflation and recognition that current monetary policy is overly restrictive given growth concerns."

On Wednesday, Fed policymakers projected a further reduction of the benchmark interest rate by 0.5 percentage points by the end of this year, a full percentage point in 2025, and an additional 0.5 percentage points in 2026, although long-term projections remain uncertain.

The British pound reached its highest level since March 2022 against the dollar following the Bank of England's decision to hold rates steady, with only external member Swati Dhingra advocating for a quarter-point cut. Sterling rose 0.60 per cent to $1.3287, peaking at $1.3314, and gained 0.2 per cent against the euro at 84.00 pence and 1.12 per cent against the yen at 190.04.

Aussie data support

Support for the Australian and New Zealand dollars came from domestic data surprises. Australian employment data exceeded forecasts for a third consecutive month in August, suggesting reduced likelihood of immediate rate cuts from the Reserve Bank of Australia (RBA). The Australian dollar was up 0.86 per cent to $0.6822.

Robert Carnell from ING remarked, "Recent Australian employment data should alleviate concerns about imminent easing from the RBA, though external economic conditions pose questions about the rebound's sustainability."

The New Zealand dollar rose 0.74 per cent to $0.6253 after data revealed a 0.2 per cent contraction in the economy for Q2, better than the anticipated 0.4 per cent decline.

The euro edged up 0.35 per cent to $1.1157 but stayed below the three-week high reached previously. The Norwegian krone strengthened in London trading, rising 0.50 per cent to $10.4550 and 0.93 per cent to 11.66 against the euro. Despite the central bank's decision to maintain rates, it signalled a possible cut in 2025.

Andrew Kenningham of Capital Economics noted, "The central bank's statement slightly leans dovish, reflecting the krone's depreciation as a key factor in its monetary stance."

(With Reuters Inputs)