Stefano Rebaudo

(Reuters) – The U.S. dollar weakened on Thursday after the Federal Reserve cut interest rates by 50 basis points and revised its monetary policy outlook. The pound sterling, the Australian dollar and the Norwegian krone outperformed their peers.

Expectations had been drifting toward a dovish outcome in the days before the Fed’s decision on Wednesday, with money markets pricing in a roughly 65% ​​chance of a 50 basis point (bp) cut. Economists polled by Reuters were leaning toward a 25 bp cut.

“The Fed’s decision was quite dovish, which bodes well for a rebound in risk and further US dollar weakness in the near term,” said Lefteris Farmakis, currency strategist at Barclays.

“But the bar is pretty high to pressure the Fed to weaken the dollar even further,” he added. “The Fed’s easing cycle that markets are pricing in is pretty significant.”

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

The index, which measures the dollar’s value against a basket of six currencies of the same value, fell 0.33% to 100.68. It had fallen to a more than yearly low of 100.21 in the previous session.

Guy Stear, head of developed markets strategy at Amundi Investment Institute, said the substantial news was “a downgrade in growth forecasts and a sharp downward correction in indicators.”

“The Fed seems confident that it has won the battle against inflation and recognizes that monetary policy is now too tight, especially given the risks to economic growth.”

Federal Reserve policymakers on Wednesday forecast the benchmark interest rate would fall another half a percentage point by the end of this year, a full percentage point next year and half a percentage point in 2026, though they said the outlook for that far into the future was uncertain.

The pound rose to its highest level against the dollar since March 2022 after the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to keep interest rates on hold, with only external member Swati Dhingra voting for a further quarter-percentage-point cut.

The pound rose 0.60% against the dollar to $1.3287 after reaching $1.3314. It was up about 0.4% ahead of the BoE meeting.

It also rose 0.2% to 84.00 pence against the euro and 1.12% to 190.04 against the yen.

The Australian and New Zealand dollars gained support from unexpected domestic data.

Australian employment in August exceeded forecasts for the third month in a row.

The data “should allay any concerns about imminent monetary policy easing by the Reserve Bank of Australia (RBA),” said Robert Carnell, regional head of research for Asia Pacific at ING.

“Until recently, there was a strange break in the implied interest rate curve at the September meeting, indicating that some investors still believed the RBA would follow the Fed’s lead and cut rates this month,” he added.

The price rose 0.86% to $0.6822.

“The Australian dollar could get some short-term support from the Fed’s dovish stance,” said Barclays’ Farmakis. “However, the economy’s dependence on China and sluggish growth outside the US raise doubts about the durability of the recovery.”

Meanwhile, the stock rose 0.74% to $0.6253 after data showed New Zealand’s economy shrank by 0.2% in the second quarter, compared with expectations for a 0.4% decline.

The dollar rose 0.50% against the yen to 142.99.

Some analysts noted a reduction in brief positions in the dollar/yen pair as markets took profits following the Fed meeting.

The euro rose 0.35% to $1.1157 but remained below a three-week high reached in the previous session.

The Norwegian krone gained in London trading and strengthened slightly after the central bank kept interest rates on hold but said it planned to cut them in 2025.

The rate was last up 0.50% to $10.4550 and then 0.93% to 11.66 against the common currency.

“This statement only slightly changes the bias to a more dovish one,” said Andrew Kenningham, chief European economist at Capital Economics.

“Policymakers also highlighted that the krona had depreciated and made it clear that this was a key factor keeping them in an aggressive mode,” he added.