SINGAPORE/LONDON – The dollar fell on Thursday but remained above recent lows after the U.S. Federal Reserve said policymakers were in no hurry to cut interest rates and was open to raising rates if inflation proved persistent.
Investors were also nervous about reports of a U.S. military buildup in the Middle East and the possibility of a conflict between the U.S. and Iran that would boost oil prices and safe-haven assets.
Meanwhile, the euro has stabilized at around $1.18 after falling sharply the previous day following reports that European Central Bank President Christine Lagarde plans to step down before her term ends next October.
Fed minutes released Wednesday showed policymakers divided on where to set U.S. interest rates, suggesting the next Fed chairman, set to take office in May, will have a hard time pushing through rate cuts.
The minutes said several policymakers expected productivity gains to curb inflation, but “most participants” warned that progress could be slow and uneven. Some hinted at the possibility of rate hikes if inflation was above target.
“This suggests there is less urgency to cut rates again, at least until the end of current Chairman Jerome’s term in May,” said Peter Dragicevic, Asia-Pacific currency strategist at Kopay.
Data on Wednesday showed U.S. factory production rose by the most in 11 months in January, while capital spending and housing starts also rose. Markets are focused on Friday’s release of global Purchasing Managers Index numbers and U.S. gross domestic product data.
Euro stabilizes after Lagarde’s remarks
The euro rose modestly against most other currencies, stabilizing after a decline sparked by speculation that Lagarde would resign from the ECB early and give outgoing French leader Emmanuel Macron a say in choosing his successor, according to the Financial Times.
His term is scheduled to end in October 2027, and his potential successor is not expected to transform monetary policy, but the speculation comes as a changing of the guard takes shape at the Fed.
“Given the number of countries at the table and the number of different members of the ECB, changes to the Fed may be more important than changes to the ECB in terms of subsequent policy direction,” said Thierry Wismann, global currency and rates strategist at Macquarie Group.
“And she could just as easily be replaced by a dove as by a hawk. It’s not clear what will happen because there were virtually no leading candidates. I think that’s why the market isn’t paying as much attention to this headline.”
Meanwhile, the yen plummeted overnight due to the Trump administration’s policies, depreciating for the second day.
Announces $36 billion worth of projects
As the first investment under Japan’s $550 billion commitment to invest in the United States.
It has lost 1.5% in value so far this week, ending slightly lower at $154.96 to the dollar.
“Japanese direct investment into the US will be a key focus this year, and this will exacerbate a very complex situation for USD/JPY,” said Chris Turner, head of global research at ING.
“The question for foreign exchange markets this year is whether this investment will support dollar flows, or whether something like Japan’s foreign exchange reserves will be used to guarantee new dollar loans and avoid pressure on the yen. The latter appears to be the more favorable outcome for Tokyo.”
The Australian dollar remained at $0.7050 after jobs data showed the unemployment rate remained at a multi-month low of 4.1%, while the New Zealand dollar rose 0.3% to $0.5982, its steepest decline since April last year after the central bank was more cautious about future interest rate hikes than most expected.
Holidays in Hong Kong, China and Taiwan boosted trade in Asia, and the yuan stabilized at 6.9 to the dollar in offshore trading during European time.
