Fed officials send signals of rate cut

The US dollar was once again in the limelight during trading on Thursday and into Friday after senior officials at the country’s central bank, the Federal Reserve, suggested that rate cuts were likely to be on the cards.

The President of the New York Federal Reserve, John Williams, said on Thursday at a meeting of leading central bankers that inflation meant that the Fed ought to take some sort of early measures to boost the economy.

However, there were mixed signals about the Fed’s approach over the course of the day. A spokesperson for the Federal Reserve of New York later released a statement to the press in which they said that the comments made by Williams did not reflect the thinking of short-term decision-making and were instead merely academic.

The next meeting of the Federal Open Market Committee, which makes the national level decisions on interest rates, will occur on 30 and 31 July.

Demand for the dollar followed this pattern predictably, going down when Williams made his statement – and then rising again when the New York Fed clarified his comments.

In its pair with the so-called safe haven Japanese yen, the US dollar was resting at 107.42 yen on Friday morning. Overall, this was an increase of a fifth of a percentage point compared to levels during the closing period of American trading – but it reflected a rise from the low point of 107.21 which it saw when the comments first came out. This was the greenback’s lowest state for almost a month.

The US dollar index, a tool used to measure what the greenback is doing in relation to other global currencies, displayed a similar trajectory. It went down to a fortnightly low point of 96.648 at first, but later on it was recorded as having risen back up to 96.792.

Uncertainty over the actions of the Fed when it next meets have plagued the dollar in recent weeks. Perceptions have oscillated dramatically between suggestions that the Fed will cut interest rates by 50 basis points or by 25 basis points.

It is as yet unknown what the bank will do, and there is still time for fluctuations to occur. However, it is now believed that there is a 40% chance that the 50 basis point cut option, which would reflect a shaving of 0.5% off the headline rate, could be on the cards.

In a sign of just how sensitive the currency is, this prediction rested at 70% after Williams’ remarks.

Elsewhere, the single European currency went up in its pair with the US dollar from $1.1266 to $1.1282.

The British pound secured some welcome respite after it was revealed that retail sales in the country were higher than had previously been expected. While this defended the currency against drops, it was not enough to help it gain significantly. Instead, it remained firm at $1.2552, and saw only small gains of just under 0.1%.

The pound’s next challenge will be the results of the Conservative leadership election, which will be announced next week.