By Rae Wee and Samuel Indyk
LONDON (Reuters) – The dollar weakened to a two-month low on Tuesday after Federal Reserve officials signalled that the central bank was nearing the end of its tightening cycle, while the pound hit a 15-month high after pay growth exceeded expectations.
Several Fed officials said on Monday the central bank would likely need to raise interest rates further to bring down inflation but the end to its current monetary policy tightening cycle was getting close.
The comments knocked the greenback to a two-month low of 101.67 against a basket of currencies, as traders pared back their expectations about how much further U.S. rates may have to rise.
U.S. interest rate expectations have been a key driver of the dollar since the Fed began its tightening cycle last year.
“Broader pressure on the USD is likely to develop as cyclical headwinds mount and markets begin to anticipate easier Fed policy settings,” said Shaun Osborne, chief FX strategist at Scotiabank.
Markets are now focusing their attention on U.S. consumer prices data due out on Wednesday, which will provide more clarity on the progress the Fed has made in its fight against stubbornly high inflation.
A survey from the New York Federal Reserve on Monday showed waning near-term inflation expectations among Americans, who said last month they were expecting the weakest near-term inflation gains in just over two years.
“The market might receive further reason to sell USD in the shape of the inflation data,” said You-Na Park-Heger, FX analyst at Commerzbank (ETR:), noting that headline and core inflation were likely to moderate.
Sterling, meanwhile, hit a near 15-month high of $1.2913 after British wage growth hit a joint record high, heaping pressure on the Bank of England to tighten policy further to bring inflation under control.
The pound has been rallying on a stronger economy and aggressive repricing of expectations for tighter BoE policy, according to Danske Bank FX analyst Kirstine Kundby-Nielsen.
“There have been no signs of relief in the labour market data and markets continue to price in more. That’s been a huge factor driving the pound,” Kundby-Nielsen said.
The yen was among the biggest gainers, strengthening around 0.6% and past 141 per dollar for the first time in nearly a month. It was last trading at 140.455.
The yen has risen more than 3% from a seven-month low touched last month, when it weakened past the closely watched 145 per dollar level that put traders on high alert for possible intervention from Japanese authorities.
“(The yen) started to stall earlier on, close to 145, and that’s because there were concerns about FX intervention,” said Bank of Singapore currency strategist Moh Siong Sim.
He said rising Japanese government bond yields, alongside a weaker dollar, have also contributed to the stronger yen.
“The market is starting to wake up again to the idea that there is a (Bank of Japan) policy risk going into the July meeting … Given the rising inflation backdrop in Japan, the market is starting to become more wary that perhaps a policy tweak could come.”
Elsewhere, the euro rose 0.1% to $1.1012, the Australian dollar steadied at $0.6680, while the New Zealand dollar fell 0.2% to $0.6198.
The offshore edged higher, last trading at 7.2055 per dollar, with sentiment underpinned by an extension of financial policy support from China’s central bank to the country’s beleaguered property sector.
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