Currencies Update: Buoyed dollar sends euro, sterling to 2 1/2-year lows
Gains by the dollar after the Federal Reserve cut interest rates sent the euro to a 26-month low against the U.S. currency on Thursday, as investors decided a lengthy Fed easing cycle was unlikely after the first rate cut since the financial crisis.
- Euro plunges to 26-month low vs dollar
- Decline comes after Fed sounds less dovish than expected
- Sterling hits 30-month low vs dollar
- Fed rhetoric, Brexit worries blamed
In a widely expected move, the U.S. central bank cut rates by 25 basis points on Wednesday to shore up the economy. But that cut and one expected later this year were considered insurance cuts, meant to prevent the economy from weakening.
“It’s not the beginning of a long series of rate cuts,” Fed Chairman Jerome Powell said after the Fed’s decision, although he added, “I didn’t say it’s just one rate cut.”
“The comments by Powell were not particularly dovish, so this is confirmation that this is a small insurance cut,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
“This outcome limits the dollar’s downside from here. Rate cuts will be on the small side, but this still strengthens the case for a prolonged U.S. economic expansion, which is positive for the dollar long term.”
The euro was last down 0.3% at $1.1040, near the 26-month low of $1.1034 it reached in Asian trading. In the past three months, the euro had shed 1.3% against the dollar.
The index that tracks the dollar against a basket of six major currencies rose as high as 98.93, a 26-month jump.
The Japanese yen fell to a three-month low of 109.32 against the dollar and was last down 0.4% at 109.16.
Sterling dropped to a 30-month low of $1.2101 during Asian trading. Fears of a no-deal Brexit continue to afflict the pound, which was last down 0.3% at $1.2120. It was higher against the weakening euro at 91.17 pence.
Britain’s deputy finance minister, Rishi Sunak, said the UK wants a Brexit deal, but “we must have the firmness to leave if necessary without a deal”.
Investors and analysts expect sterling to decline further as more headlines emphasize the growing probability Britain will quit the European Union without trade agreements on Oct. 31.
Sentiment for sterling took a turn for the worse after Britain’s new prime minister, Boris Johnson, packed his cabinet with Brexit supporters last month.
“Sterling remains vulnerable to a further escalation in Brexit tensions and we anticipate the market will likely discount higher risks of a ‘no deal’ outcome in the weeks ahead,” said Roger Hallam, currency chief investment officer at J.P. Morgan Asset Management.
Traders will be watching the Bank of England monetary policy announcement later on Thursday to see whether it will respond to the growing probability of a no-deal Brexit. The BoE is widely expected to keep its benchmark interest rate unchanged at 0.75%.
Elsewhere, the Swiss franc was flat at 1.10 against the euro and the Australian dollar was unchanged at 0.6849 against the dollar.