By Alden Bentley

NEW YORK (Reuters) – The dollar fell and the pound rose to its highest level in more than two years on Friday after Federal Reserve Chairman Jerome Powell gave an unambiguous signal that a long-awaited U.S. interest rate cut would come next month.

The feeble dollar pushed the euro to a 13-month high and the U.S. currency to a 17-day low against the yen.

In his opening speech at the Federal Reserve’s annual economic conference in Kansas City and Jackson Hole, Wyoming, Powell said, “The time has come to adjust policy,” given that the risks of upside inflation have declined and the risks of downside employment have increased.

“We do not seek or welcome a further cooling of labor market conditions,” Powell said. “We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate reduction in policy restraint, there is good reason to believe that the economy will return to 2% inflation while maintaining a strong labor market.”

Traders on Friday were still betting on a quarter-percentage-point rate cut at the Fed’s Sept. 17-18 meeting, giving them a 65% chance after Powell’s remarks. But they were pricing in a larger 50-basis-point cut, up from a probability of just over one in four earlier.

The euro and yen rose. That weakened the , which measures the U.S. dollar against a basket of six currencies including those two. The index fell 0.81% from behind schedule Thursday evening to 100.64, having been slightly stronger before Powell’s speech.

“I think the market reaction, which is a slightly weaker dollar and slightly lower bond yields, is OK. It’s not like he said, ‘Yeah, we’re going to do three 50s to start an easing cycle,'” said Steve Englander, head of G10 FX research at Standard Chartered (OTC:) Bank in New York.

“It implicitly opens the door to 50 at some point, without giving a timeline. We still don’t think 50 (basis points) will be the first move, but it could happen quickly if the labor market continues to weaken,” he said, referring to the Fed chairman’s comments on inflation and employment.

The decision in September would mark a shift from the tight interest rate policy in place since March 2022, when the Fed began raising rates to combat inflation, and would raise the federal funds target from around zero to 5.25% to 5.5%, where it has been since July 2023.

That same day, Federal Reserve Bank of Chicago President Austan Goolsbee told CNBC that while he was not ready to outright call on the central bank to cut interest rates, monetary policy was quite restrictive and ill-suited to the current economic situation.

“The currency market is a relative game, so expectations that the Federal Reserve will soon join other major banks in cutting interest rates are driving the dollar lower,” said Uto Shinohara, managing director and senior investment strategist at Mesirow in Chicago.

The pound rose to its highest level in more than two years against the dollar as Powell’s negative comments on the greenback coincided with signs of a strengthening UK economy.

The pound was up 0.94% in afternoon trading at $1.3211. It was at $1.32295, its highest since behind schedule March 2022, after surpassing a 2023 peak of $1.3144.

The change was prompted by a survey showing that UK consumer confidence remained at its highest level in almost three years in August, contributing to positive signals across the economy.

The euro ended the day up 0.75% to $1.1195, just below an afternoon high of $1.12015. That level hasn’t been seen since July 20, 2023.

The dollar fell to its lowest level against the yen since August 6, ending the day down 1.36% to 144.27.

The yen has gained since Bank of Japan Governor Kazuo Ueda earlier on Friday reiterated his determination to raise interest rates if inflation remains at a rate that sustains the bank’s 2% target.

“The comments suggest that the market turbulence will not deter the BOJ from considering further rate hikes in the future, even if the next move is not imminent,” said Vasu Menon, managing director of investment strategy at OCBC.

“As long as the dollar’s ​​move against the yen is orderly and gradual, it shouldn’t shake global markets as much as it did earlier this month.”

Against the Swiss franc, the dollar weakened by 0.52% to 0.848 francs.

The Canadian dollar fell 0.82% to CAD1.3511.

The Australian dollar was up 1.36% at $0.6795. The greenback was up 1.53% at $0.6229.

increased by 4.2% to $63,227.00.