Dollar rebounds after Fed goes big on rate cut

The U.S. dollar rose broadly on Thursday, recovering from an earlier tumble in the immediate aftermath of the Federal Reserve's outsized interest rate cut that had been largely priced in by markets.

The U.S. central bank on Wednesday kicked off its monetary easing cycle with a larger-than-usual half-percentage-point reduction that Chair Jerome Powell said was meant to show policymakers' commitment to sustaining a low unemployment rate now that inflation has eased.

While the size of the move had been anticipated by investors in part due to a slew of media reports pointing in that direction ahead of the decision, it defied the expectations of economists polled by Reuters, who were leaning toward a 25-basis-point cut.

Still, markets reacted in a typical "buy the rumour, sell the fact" fashion that kept the dollar on the front foot in early Asian trade. It rebounded from a more than one-year low against a basket of currencies in the previous session and was last marginally higher at 101.03.

Against the yen, the greenback gained 0.58% to 143.12 . The euro fell 0.04% to $1.1113, away from a three-week high hit in the previous session.

"Obviously, (there was) a lot of volatility on the announcement, but in terms of the pricing action and the information that came out ... it's not really that controversial in a sense," said Rodrigo Catril, senior FX strategist at National Australia Bank (NAB).

"It's sort of been pretty close to what the market has been pricing, particularly in terms of expectations of - arguably a little bit more than a 100 - but 100 bps of rate cuts this time around and another 100 next year, and also a terminal rate that is below 3% as well. So the big picture ... is not materially different."

Fed policymakers on Wednesday projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year and half of a percentage point in 2026, though they said the outlook that far into the future is necessarily uncertain.

"Our view is that the dollar will depreciate next year. That is a cyclical story, not a structural story," said Eric Robertsen, Standard Chartered's global head of research and chief strategist at a media roundtable in Singapore on Wednesday.

"We think the dollar is going to weaken because the Fed is easing interest rates and the global economy will experience a soft landing, which tends to be a benign scenario that tends to be negative for the dollar."

Sterling fell 0.11% to $1.3199 after scaling a peak of $1.3298 in the previous session, its strongest level since March 2022.

That came in the wake of data on Wednesday which showed British inflation held steady in August but sped up in the services sector closely watched by the Bank of England, reinforcing bets that the central bank will keep interest rates on hold later in the day.

"When it comes to the Bank of England, clearly those inflation numbers yesterday show that they still have a concern or a problem with inflation, and in particular services inflation is still too high for comfort," said NAB's Catril.

"So to expect an easing today because of what the Fed has done seems a little bit too hard to believe."

Elsewhere, the Australian dollar edged up 0.05% against its U.S. counterpart to $0.6768, while the New Zealand dollar advanced 0.04% to $0.6210.

Data out on Thursday showed New Zealand's economy contracted in the second quarter as activity fell in a number of industries, though the figures came in better than forecasts.