Dollar slips after Fed holds rates; ECB follows with a hold

The European Central Bank left interest rates unchanged on Oct. 29, a day after the Federal Reserve held rates and the dollar fell against major currencies. The Bank of Japan was expected to leave rates unchanged at its Oct. 30 meeting. The dollar has been supported by resilient U.S. data but faces headwinds, including rising inflation. 

ALSO READ: BSP Hikes Rates by 50 Basis Points for Fourth Straight Time as Inflation Hits 7.2%

Five central banks, two directions

The week’s decisions were not expected to move in lockstep. The Federal Reserve, the European Central Bank, and the Bank of Japan were all expected to hold rates steady despite inflation pressures, while the Reserve Bank of New Zealand and the Bank of Canada were expected to raise rates. 

Four of the five have decided as of Oct. 29. The Fed delayed any change until after the U.S. midterm elections and is awaiting further inflation data. The dollar reacted little at first, then lost ground as Chairman Kevin Warsh spoke at his press briefing. 

The Bank of Canada raised its key policy rate for the first time in more than three years and said further increases might be needed to keep soaring energy costs from fueling broader inflation. The Reserve Bank of New Zealand held its rate at 2.75%, surprising a large majority of economists who expected a hike, and the New Zealand dollar fell as much as 1.74% to $0.5583. 

The ECB kept all three of its key interest rates unchanged, with the deposit rate at 2.5%. It said energy prices “have continued to rise,” posing upside risks to inflation and downside risks to growth, and that underlying inflation has remained broadly stable so far. It added that financing conditions have tightened since its last meeting and that it is “not pre-committing to a particular rate path.” 

On Oct. 28, the dollar index fell 0.2% to 102.15. The euro rose 0.32% to $1.1160, and the Canadian dollar gained 0.37% to C$1.40 per dollar. 

Marc Chandler, chief market strategist at Bannockburn Global Forex, said the dollar was “softer” than before the Fed meeting because of a “steepening in the yield curve.” Markets are pricing in a nearly 85% chance of a Fed rate hike in December, according to the CME’s FedWatch tool.

Energy costs add pressure. Brent crude settled at $115.81 per barrel on Oct. 26, still near six-month highs. According to Reuters reporting published on Euronext, Societe Generale’s chief global FX strategist, Kit Juckes, said on Oct. 26 that the dollar is performing worse than expected and faces some headwinds, even though U.S. data has held up well.