Dollar languishes near four-year lows after Fed stands pat; euro back below $1.20

Investing.com - The U.S. dollar slipped slightly on Thursday and traded near a four-year low, unable to build on the previous session’s gains after the Federal Reserve left interest rates unchanged.  

At 12:00 ET (17:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 96.27, still on the back foot after a period of heavy selling.

Dollar stabilizes near four-year low 

The dollar stabilized somewhat on Wednesday after the Fed left interest rates unchanged at 3.75% as widely expected, with Chair Jerome Powell stating that the U.S. economy remained “solid” with lower risks to both inflation and employment. 

Traders took this more sanguine tone to suggest that rates could be on hold for a few months at least, helping provide some support to a currency that had appeared to be in freefall earlier in the week.

The dollar had fallen this week to its lowest level since 2022, already dropping around 2% so far this year, on concerns over U.S. President Donald Trump’s inconsistent policymaking and the independence of the central bank, as well as signals the U.S. was willing to take part in coordinated intervention to boost the Japanese yen at the expense of the greenback.

"The ongoing slide in the broad U.S. dollar is having important reverberations around the globe, including for central banks. A number of countries — including the Antipodes, Scandis, Brazil, Mexico, South Africa, and Chile — have seen outsized currency gains of 4-5% since the start of the year," JPMorgan analysts led by Maia Crook noted in a research note.

"In EM, where FX-passthrough tends to be strong and goods account for a larger share of consumer baskets, the dollar’s slide increases policy space both by lowering inflation and reducing financial stability concerns. A dovish pivot already looks to be under way in a number of countries," the analysts said.  

Euro back below $1.20 

In Europe, EUR/USD was largely flat at 1.1949. The currency pair was back below the 1.20 level after having broken though that key resistance level earlier in the week.

The single currency’s strength has prompted European Central Bank policymakers to express growing concerns over the potential dampening impact this could have on inflation in the region, and thus monetary policy.

“For the moment, nothing is showing in ECB pricing. We suspect that markets will await any clarification in this sense by Lagarde at next Thursday’s meeting before buying into this narrative,” said analysts at ING, in a note.

“Another move past 1.20 today could trigger further upside volatility, with the 1.208 Monday high quite possibly being tested. We’ll instead need to see a significant break below 1.190 before we can conclude the tide is turning on the pair.”

GBP/USD was also little changed at 1.3800, just below levels last seen in October 2021 in the previous session, while USD/SEK was unchanged at 8.8258 after the Swedish Riksbank kept its policy rate unchanged at 1.75% for the fourth consecutive month.

“The Riksbank has been clear that only major deviations in data and/or serious external events can trigger rate adjustments in the near term,” ING added. “And while the euro’s strength is already causing some protests in Frankfurt, the Riksbank has held a long-standing view that SEK is meaningfully undervalued.” 

Yen retains recent gains  

In Asia, USD/JPY traded 0.4% lower to 152.87, with the Japanese yen retaining recent gains as markets speculated over fresh intervention to support the currency.

The pair remained close to a three-month low after Prime Minister Sanae Takaichi warned against excessive volatility in the yen.

Reports also suggested that U.S. and Japanese officials were considering a joint intervention to support the yen, keeping investors wary of betting against the Japanese currency. 

Elsewhere, USD/CNY was largely unchanged at 6.9480,  near its lowest level since May 2023, while AUD/USD slipped 0.2% to 0.7019. Hotter-than-expected Australian inflation data has spurred bets that an interest rate hike by the Reserve Bank is imminent.

Peter Nurse contributed to this article