Fed-driven dollar surge fades, focus moves to ECB meeting

The dollar slipped back from three-week highs against the yen on Thursday, quickly erasing gains made after the Federal Reserve took a slightly more hawkish policy tone in signalling two more rate hikes by year-end.

The greenback’s bounce faded as traders booked profits before the European Central Bank’s meeting later on Thursday, where policymakers are seen discussing the timing of winding down the ECB’s 2.55 trillion euro bond-purchase program.

Fresh concerns about US-China trade relations were also seen weighing on the dollar against the yen, which is often sought in times of political tensions.

US President Donald Trump will meet with his top trade advisers on Thursday to decide whether to activate threatened tariffs on billions of dollars in Chinese goods, a senior Trump administration official said.

The dollar last traded at 110.19 yen, down 0.15 percent, having lost steam after hitting a three-week peak of 110.85 shortly after the Fed’s latest policy statement, which saw a solid outlook for the world’s biggest economy.

The euro nudged up 0.1% to $1.18, bouncing back from $1.17 hit after the Fed’s announcements and edging near last week’s high of $1.18.

The dollar index against a basket of six major currencies dipped 0.2% to 93.525 after briefly rising to 94.028 on Wednesday.

“In an increasingly uncertain world, US monetary policy remains reassuringly boring,” said Stefan Kreuzkamp, chief investment officer at Deutsche Bank’s asset management arm DWS.

“Policymakers painted a generally upbeat picture of the US economy’s prospects. Despite ongoing trade frictions, both we and the Fed expect (US) growth to persist above trend at least through next year.”

As widely expected, the Fed lifted key overnight borrowing costs by a quarter percentage point for a second time this year, to between 1.75% and 2.00%.

It also ended its pledge to keep rates low enough to bolster the economy for “some time” and signalled it would tolerate above-target inflation at least through 2020. Policymakers projected two more rate increases by the end of this year, compared to one previously.

After the Fed statement, the market focus shifted to the ECB’s policy review later in the global day.

Although the ECB is widely expected to stand pat, some traders speculate it may offer clues on its intentions to begin tapering its bond purchases this year.

Others reckon the policymakers may refrain from signalling changes to ECB’s stimulus program given Italy’s political plight and a recent spate of disappointing data in the euro zone.

China suprise

The People’s Bank of China (PBOC) left borrowing costs for interbank loans unchanged on Thursday, a surprising decision that shrugged off the Fed’s rate increase and highlighted challenges policymakers face amid a trade spat with the United States and signs of the economy losing momentum.

Analysts had expected the PBOC to follow the Fed to increase interest rates modestly to keep the spread between Chinese and US yields stable, reducing the risks of potential capital outflows that could pressure the yuan currency.

“There is no urgency for China to maintain its favourable yield differential against the United States as capital outflow and currency stability is no longer the key concern for China at the moment,” said Tommy Xie, economist at OCBC Bank, in a note.

“With US-China trade war looming, a slightly weaker yuan may be in China’s favour.”

The yuan’s immediate reaction to the PBOC not raising borrowing costs was limited, with the currency a shade firmer at 6.39 against the dollar.