On Wednesday, the US dollar extended its losses and dropped to a low of nine months against a basket of its peers.
This was after Jerome Powell, the chairman of the Federal Reserve, talked about the progress made in reducing inflation pressures, even as he warned of further tightening in the monetary policy.
The US central bank hiked its interest rate by 25 basis points in its meeting, as widely expected, and the chairman spoke at a news conference after it.
Powell stated that he was not fully sure of when they would stop jacking up the borrowing costs as it moves forward with its efforts to tame inflation.
He also talked about disinflation, but quickly added that it was just in the early stages, and added that they would make decisions on a meeting-by-meeting basis.
Market analysts said that investors are now sure that Powell is confident about inflation declining and two more inflation reports will be published before the Fed’s meeting in March.
If pricing pressures continue to decline, then it is possible that the US central bank may only have to deliver one more rate hike and not more, as expected.
Analysts said that this would prove to be good for risky assets and the euro, but it would result in the dollar dropping to its lowest levels in the last few months.
Even though the Fed has not signaled so, investors have been pricing in a more dovish stance because they believe growth will take a hit due to tighter monetary conditions.
This could potentially drive the US economy into recession, which will prompt the Fed to start cutting rates instead of hiking them.
Fed funds futures have priced in a benchmark interest rate hitting its peak in June at 4.89%, before declining in December to 4.39%.
The last ‘dot plot’ of the Fed back in December had shown that officials had expected the interest rate to rise above 5%.
Powell further added that short-term moves were not the focus of the US central bank due to which loosening financial conditions did not worry them.
He stated that they wanted to ensure that they could bring sustained changes in the financial conditions.
There was a drop in the US dollar against a basket of major currencies to as low as 101.03, which is the lowest it has been since April of last year.
The euro, on the other hand, climbed to its highest since April 4th at $1.10020. The dollar also recorded declines against the yen to reach the lowest since 20th Jan at 128.55.
On Wednesday, the ADP National Employment report showed that the labor market might finally be cooling down.
The numbers showed that there was an increase of 106,000 jobs in the US private payrolls in the previous month, which was far less than expected.
This week’s focus will be on the government’s jobs report for the previous month, which is due for release on Friday.