The dollar tumbled to a three-week low against the yen on Thursday after Federal Reserve Chairman Jerome Powell eased investor concerns about continued aggressive monetary tightening.
The US currency fell to 135.105 yen, its lowest level since July 6, after the Fed raised interest rates by 75 basis points, as expected, to bring them closer to neutral while noting that the labor market continues to weaken, but other economic indicators relaxed.
The USD/JPY pair is highly sensitive to changes in US yields, which have tumbled after Powell said he doesn’t believe the economy is in a recession because of employment and that a recession is not needed to tame overheated inflation.
“The dollar has lost some ground because I think the market is bracing for what Fed Chairman Powell might look a little more hawkish,” said Rodrigo Catril, senior currency strategist at the National Bank of Australia.
“Markets have focused on his comments that we are very close to neutral interest rates,” Catrill said. “Now there is potential to slow down the pace of rate hikes, and the market likes that.”
The dollar last fell 0.8% to 135.525 yen.
The 2-year Treasury yield, particularly sensitive to political expectations, fell near its lowest level this week at 2.9979%.
However, it remained about 20 basis points above its 10-year yield, widely seen as a signal of an impending downturn. This is called a yield inversion when investors expect an economic downturn and lower interest rates. The demand for long-term bonds is higher than for short-term ones, so interest rates are lower.
Whether the US economy meets the definition of a technical recession with two consecutive quarters of contraction in output will be known later on Thursday after the release of GDP data, which will be the market’s next focus.
“People are cutting their long (dollar) positions ahead of potentially negative US data,” said Masafumi Yamamoto, chief FX strategist at Tokyo-based Mizuho Securities.
Speaking of the yen in particular, “those who were expecting a rapid rise in US interest rates are probably taking profits now,” Yamamoto added.
The dollar index, which measures the dollar against six currencies, including the yen, fell 0.05% to 106.31 after falling 0.59% yesterday. The level below 136.1 was the lowest since July 5.
The euro, the most weighted currency in the index, was virtually unchanged at $1.02045 after gaining 0.82% on Wednesday.
The pound rose 0.05% to $1.21640 after gaining 1.06% on Wednesday. Bitcoin is up 1.33% to $23,081.18 after gaining more than 8% in the previous session.
