The dollar plumbed a three-week low against a basket of major currencies on Friday, a day after the US Federal Reserve again kept interest rates on hold, disappointing those investors who had been expecting a first hike in almost a decade.
Only a small majority had bet the Fed would keep rates unchanged, while a significant minority had reckoned on a rate rise. Furthermore, though the central bank left open the possibility of modest policy tightening later this year, Fed Chair Janet Yellen said the global growth outlook had become less certain. The announcement triggered broad weakness for the dollar, and those losses were extended on Friday, with the greenback dropping half a percent against a currency basket to hit 94.063, its weakest since late August.
Rabobank currency strategist Jane Foley, in London, said that the Fed's announcement should be considered just as a postponement of policy tightening, and not a change of plan. "Yellen (made clear) that as things stand, there's a very strong chance that they will hike interest rates later this year and therefore you have to question how far dollar weakness can extend," she said.
The prospect of loose monetary conditions for longer reignited investors' appetite for riskier currencies such as the Australian and Kiwi dollars gained sharply. The only major currency that was slightly weaker on the day against the dollar was the euro, which edged down 0.1 percent to $1.1428, having hit a three-week high of $1.1460 earlier, after gaining 1.2 percent on Thursday.
Simon Derrick, head of currency research at Bank of New York Mellon in London, said renewed risk appetite would keep any euro gains limited. The euro has benefited from risk aversion in recent months, as investors who had held euro-funded positions on riskier currencies bought back the single currency. In what amounted to a tactical retreat, Yellen also said in her statement that developments in a tightly linked global economy had in effect forced the US central bank's hand, and warned recent developments abroad and in financial markets could put further downward pressure on inflation in the near term.
"The...interesting bit about it was the fact that she was quite so explicit in terms of laying out exactly why they weren't doing anything," Derrick said. "Yes, they talked about inflation quite clearly, but front and centre were concerns about what was happening in China, and more generally for emerging markets."
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