Dollar rally stalls as market digests Fed’s cooler approach to easing

NEW YORK/LONDON/SINGAPORE: The dollar on Thursday edged back from a two-year peak hit the prior session after the Federal Reserve signaled a much slower pace of rate cuts in 2025, while the yen slid after the Bank of Japan stood pat on rates.

The pullback in the dollar subsided after the final read on US third quarter GDP showed the economy grew at a 3.3% annual rate, stronger growth than the prior reading of 3.0% and economists’ average forecasts of 3.1%. The number validated the Federal Reserve’s cautious new take-it-slow approach to easing, as did a bigger-than-expected fall in the number of applications for unemployment insurance to 220,000 last week.

Currencies around the world tumbled on Wednesday after the Fed decision sent yields higher and boosted the dollar, although many rebounded on Thursday in choppy trading conditions with thin volumes ahead of the holiday period. The dollar index was last down 0.23% after jumping more than 1% on Wednesday to 108.25, its highest level since November 2022.

The week has been chockablock with the last central bank policy meetings of 2024. The BOJ kept interest rates steady as expected, but the yen fell sharply as Governor Kazuo Ueda gave little away in a post-meeting press conference.

The dollar rose 1.51% against the yen to 157.13, trading at its highest levels since July. “The main focus has been on the central bank decisions, which were very dollar supportive overall. The Fed had a hawkish cut and the Bank of Japan delivered a dovish hold, and those were probably the main two drivers,” said Vassili Serebriakov, FX strategist at UBS in New York.

Investors had been looking out for hints of imminent BOJ tightening, particularly after the Fed struck a hawkish tone at its meeting a day earlier. But the governor reiterated that policymakers would need more time to assess incoming economic data and the implications of US President-elect Donald Trump’s policies. “I think the market was anticipating that the furthest they would go today would be a hawkish hold,” said Jane Foley, head of FX strategy at Rabobank. “But some of the comments Ueda has made could perhaps be interpreted as not being very hawkish. For example, that he’s waiting to see data on the momentum of wages in the spring wage talks.” The fallout from the Fed continued to ripple across financial markets after traders heavily dialed back on easing expectations next year. The euro, which tumbled 1.34% on Wednesday, managed to claw back some losses and was last 0.48% higher at $1.0402.

Foley at Rabobank said the euro was naturally rebounding and volatility was higher due to low holiday trading volumes. The Bank of England held interest rates at 4.75% as expected on Thursday, but the pound fell after three policymakers voted for a cut, surprising investors who had expected only one official to opt for a reduction.