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Dollar Weakens as Fed Shifts Interest Rate Hike Outlook

The U.S. dollar weakens as the Federal Reserve signals a potential halt to interest rate hikes, impacting global currencies and financial markets.


Fed Alters Interest Rate Hike Stance

The dollar faced pressure near seven-week lows on Thursday as the U.S. Federal Reserve indicated a potential halt to interest rate hikes. The market believes that the era of consistent rate increases may be nearing its end. The Fed raised its benchmark funds rate by 25 basis points as expected but replaced "ongoing increases" language with "some additional" rises while monitoring the impact of wavering bank confidence on the economy.

Euro and Sterling Gain on Fed's Tone Shift

As futures suggest only a 50% chance of one more hike, the gap between U.S. and European interest rates has caused the euro to surge, reaching a seven-week high of $1.0912 on Wednesday. Sterling also approached a seven-week high as British inflation unexpectedly increased to 10.4%, putting pressure on the Bank of England to raise rates and adopt a hawkish tone in its upcoming meeting.

Central Banks Adjust Rates Amid Market Shifts

Markets have priced in a 25-basis-point hike from the Bank of England, while traders anticipate a 50-basis-point increase at the Swiss National Bank. The franc is recovering from a previous slide due to concerns over Credit Suisse. The change in the Fed's tone reduces the likelihood of markets worrying about strong economic data pushing rates higher, according to NatWest Markets head of G10 FX strategy Brian Daingerfield.

Bank of England
Bank of England

Dollar Struggles Despite Yellen's Remarks

Although the dollar initially found support when U.S. Treasury Secretary Janet Yellen told Congress she had not considered or discussed blanket bank deposit insurance, it mostly reversed in Asia. The Australian and New Zealand dollars rose 0.7% and 0.8%, respectively, while the dollar/yen fell 0.7% to a six-week low of 130.50.

Banking Confidence Wanes Amid Global Concerns

Financial markets have been destabilized by faltering confidence in banks globally following a run on Silicon Valley Bank and the sudden collapse of Credit Suisse. Focus has shifted to U.S. regional lenders where fears of a contagious run on deposits persist. Fed Chair Jerome Powell mentioned deposit flows have stabilized in the last week, and smaller lenders expressed relief after Yellen remarked on considering deposit insurance if contagion risks arise.

Bitcoin Drops Amid SEC Lawsuits on Crypto Promotion

Bitcoin's value dropped 3% to $27,360 on Wednesday. It remained near that level on Thursday following a series of U.S. Securities and Exchange Commission lawsuits targeting crypto promotion, dampening enthusiasm for digital assets.