WASHINGTON, Aug 24 (Reuters): The dollar fell and sterling rose to its highest in more than two years on Friday after Federal Reserve Chair Jerome Powell gave an unambiguous signal that the long-anticipated US interest rate cut would come next month.
The weak dollar also saw the euro hit a 13-month high, and the US currency marked a 17-day low versus the yen.
At his keynote speech to the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming, Powell said, "The time has come for policy to adjust," given that upside risks to inflation have diminished and downside risks to employment have increased.
"We do not seek or welcome further cooling in labour market conditions," Powell said. "We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 per cent inflation while maintaining a strong labor market."
Traders on Friday continued to bet on a quarter-per centage-point rate cut at the Fed's Sept. 17-18 meeting, putting the odds at 65 per cent after Powell's remarks. But they priced in about a one-in-three chance of a bigger 50-basis point cut, up from a little more than a one-in-four probability earlier.
The euro and yen rose. This weakened the dollar index =USD, which measures the greenback against a basket of six currencies including those two. The index fell 0.81 per cent from late Thursday to 100.64, having been slightly firmer before Powell spoke.
"I think the markets' reaction, which has been the dollar a bit weaker, bond yields a bit lower, is about right. It's not like he said, 'Yeah, we're going to do three (cuts of) 50s to begin the easing cycle'," said Steve Englander, head of G10 FX research at Standard Chartered Bank in New York.
"Implicitly, it opens the door to 50s at some point without giving a timetable for it. We still don't think 50 (basis points) is going to be the first move, but it could come quickly if the labor market continues to weaken," he said, referring to the Fed chief's remarks on inflation and employment.
A move in September would pivot the Fed away from a restrictive interest rate policy in place since it started hiking to fight inflation in March 2022, hoisting the fed funds target range from about zero to 5.25 per cent-5.5 per cent.
