Currencies: Dollar Jumps, Recovers Post-Fed Losses

The U.S. dollar climbed in Thursday trading, retracing some of its losses from the previous session that it incurred after the Federal Reserve reinforced its dovish policy stance.

The U.S. central bank cut its expectations for 2019 interest-rate increases to zero from two, and downgraded its economic outlook, as Chairman Jerome Powell stressed that it was a “great time” to be patient. The greenback, measured by the ICE U.S. Dollar Index DXY, +0.44% in response fell 0.7% and recorded its sharpest daily percentage drop since Jan. 25 on Wednesday, according to FactSet.

In early Thursday trading, the gauge was up 0.8% at 96.489.

“The Fed’s second dovish surprise in a row was meant to calm markets. However, we think it will likely do just the opposite,” said Win Thin, global head of currency strategy at Brown Brothers Harriman. “Markets often need to see confidence emanating from policy makers to feel confident as well. How can the Fed justify moving from ‘a long way from neutral’ back in the fall to the current stance that rates may go up or down? We simply do not believe the fundamental picture has changed that much.”

For now, interest-rate differentials still favor the dollar, Thin said. The Fed pressing pause didn't make other central banks’ rates go up. The European Central Bank and Bank of Japan are still at their post-financial crisis lows, for example.

In U.S. economic data, jobless claims for the week ended March 16 came in at 221,000, just below expectations, while the Philly Fed index for March jumped to 13.7, exceeding expectations of 3. Leading economic indicators for February were up 0.2%.

Elsewhere, Norway’s central bank raised its key interest rate to 1% from 0.75% before, as expected. The Norwegian krone USDNOK, -0.0402%  gave back much of its gains, following the release, with one dollar last buying 8.4692 krone, down 0.4%. The G-1 currency had climbed to its best level in six-weeks after the central-bank decision.

In other central bank news, the Bank of England left interest rates unchanged and cautioned on the risk of Brexit. The central bank said that U.K. economic data had already been mixed but the outlook remained reliant on the nature and timing of Brexit.

The British pound GBPUSD, +0.1526%  didn’t react much to the BOE statement, as it was widely expected. Sterling slid to a two-week low of $1.2981at its low point of the session, but rebounded some shortly after as reports emerged that the European Union was proposing a conditional extension of the March 29 Brexit deadline to May 22. However, the British Parliament has to agree to Prime Minister Theresa May’s deal in order for the extension to take place. A vote on the withdrawal agreement, which has been rejected twice already in its previous forms, is expected next week.

What will happen if lawmakers once again reject May’s deal is unclear. The EU is said to offer a nine-months delay if the premier loses again next week, according to a Bloomberg report.

The pound last bought $1.3067, compared with $1.3194 late Wednesday.

Brexit Brief: EU tells Theresa May — it’s deal, or no deal

The euro EURUSD, +0.0000%  pared some of the last session’s gains and slipped to $1.1356 from $1.1415, largely driven by the swing in the dollar.

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