On Thursday, Asian indices fell to six-week lows and the dollar rose after the U.S. Federal Reserve delivered a 25-basis-point rate cut as expected but poured cold water on market expectations of a lengthy easing cycle.
In his press conference, Fed Chair Jerome Powell was more ‘hawkish’ than expected, wrong-footing traders who were hoping for a more ‘dovish’ cut i.e. more explicit confirmation of further policy easing.
Speaking in a news conference after the release of the central bank’s statement, Powell characterised the rate cut as “a mid-cycle adjustment to policy”, citing signs of a global slowdown, simmering U.S. trade tensions and a desire to boost too-low inflation. Markets took that as a sign that sharp further cuts were not imminent.
Later in a news conference, Powell said Wednesday’s move was “not the beginning of a long series of rate cuts”, sending U.S. equity markets into a tailspin and dollar to its highest since May 2017 against a basket of six major currencies.
U.S. Treasuries reacted to Powell’s remarks by flattening the yield curve as the front-end of the market scaled back on prior expectations for at least a 100 basis points of easing in the near-term. Notably, yields on 10-year bonds too came under pressure.
Further hurting sentiment, the United States and China ended a round of meetings without much progress on their ongoing tariff war.
The dollar rose against the euro and Antipodean currencies on expectations monetary policies in Europe, Australia and New Zealand will remain accommodative.
The dollar index finished July 2.5% higher.
The common currency euro hit a more than two-year trough of $1.1058 overnight and was last at $1.1048.
The Aussie held at $0.6848 after falling to $0.6832, its lowest since early January when a currency "flash crash" briefly took it to $0.6715.
The kiwi held at $0.6561 as markets wager on a rate cut by the Reserve Bank of New Zealand next week.
The Japanese yen the dollar broke above 109.19 to jump to the highest since end-May.
Crude oil futures settled higher on Wednesday for the fifth straight day, buoyed by a bigger-than-expected drop in U.S. inventories, but the stronger dollar helped bring prices down from session highs in post settlement trading.
U.S. crude futures fell more than $0.85 to $57.71 per barrel. Brent was down $1.03 at $64.05.
Spot gold made a new two-week trough on Thursday after falling to $1409.
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