NEW YORK: The dollar fell against the euro on Thursday after the ECB kept rates steady even as it acknowledged cooling inflation, and the US currency extended its decline against most other majors a day after Fed Chair Powell said the central bank still expects to cut rates later this year.
The European Central Bank kept borrowing costs at record highs on Thursday and stressed that, while inflation was easing faster than it anticipated only a few months ago, it was still not ready to lower rates.
Leaving its main interest rate unchanged at 4.0% as expected, the ECB tweaked its messaging slightly to reflect a continued fall in inflation over the past 1-1/2 years and new, lower economic projections.
“We are making good progress towards our inflation target and we are more confident as a result - but we are not sufficiently confident,” ECB President Christine Lagarde told a press conference.
While the policymakers did not discuss cuts for this meeting, they are just beginning to discuss the dialling back of their restrictive stance, Lagarde said.
That discussion signals “the ECB is getting closer and closer to that starting point for dialling back stimulus,” said Bipan Rai, North America head of FX strategy at CIBC.
The euro was 0.3% up against the dollar at $1.0928, a six-week high.
The ECB message follows Federal Reserve Chair Jerome Powell’s remarks on Wednesday where he told lawmakers interest rate cuts were still likely in coming months but only if warranted by further evidence of falling inflation.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits was unchanged last week as the labor market continued to gradually ease. The Labor Department’s February employment report is due on Friday.
Meanwhile, the yen was set for its biggest jump versus the dollar this year on Thursday, driven by growing speculation that the Bank of Japan could finally raise rates this month.
Against the yen, the dollar was down 0.93% to 148.025, the weakest it has been in more than a month.
BOJ board member Junko Nakagawa said on Thursday Japan’s economy was moving steadily towards sustainably achieving the central bank’s 2% inflation target.
Her comments come one day after Jiji news agency reported that at least one of the central bank’s nine board members is likely to say that removing negative interest rates would be reasonable at this month’s policy meeting.
The yen has been under pressure for most of the past two years because of the gap between sub-zero Japanese interest rates and a global rise in rates, as other major central banks aggressively hiked interest rates to tame inflation.
With market participants significantly short the Japanese currency, anything that even mildly supports the yen can spark a sharp move in the Japanese currency, CIBC’s Rai said.
“Everybody is quite considerably short the yen, I think that’s what is behind the move today,” Rai said.
Speculators’ net short positioning on the yen stood at 132,705 contracts, the largest bearish position in more than six years, according to CFTC data for the week ended Feb. 27.
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