TOKYO—The dollar dropped to a three-week low versus the yen on Thursday after Federal Reserve Chair Jerome Powell assuaged investors’ worries about continued aggressive monetary tightening.
The U.S. currency sank as low as 135.105 yen, its weakest since July 6 after the Fed raised the benchmark rate by an as-expected 75 basis points to bring it closer to neutral, while noting that although the labor market remains strong, other economic indicators have softened.
The dollar-yen is highly sensitive to shifts in U.S. yields, which slid after Powell said that based on the strength of employment, he didn’t believe the economy was in recession, and that a recession was not necessarily required to tame super-heated inflation.
“The dollar lost a little bit of altitude because I think the market was bracing for the potential of Fed chair Powell to sound a little bit more hawkish,” said Rodrigo Catril, a senior FX strategist at National Australia Bank.
“The markets sort of focused on his comments around the fact that we are getting very close to neutral,” Catril said. “There’s potential now to slow down the pace of hikes, and the market likes that.”
The dollar was last down 0.8 percent at 135.525 yen.
The two-year Treasury yield, which is especially sensitive to policy expectations, sagged near its lowest level this week at 2.9979 percent.
It remained about 20 basis points above the 10-year yield though, widely seen as signaling a looming downturn.
“People are reducing their long (dollar) positions ahead of potentially negative data out of the U.S.,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
Against the yen specifically, “those who had expected rapid rises of U.S. interest rates are probably here taking profit,” Yamamoto added.
The dollar index, which measures the greenback against six counterparts including the yen, edged 0.05 percent lower to 106.31 after dropping 0.59 percent overnight. Below 106.1 would be the lowest since July 5.
The euro, which is the most heavily weighted currency in the index, was little changed at $1.02045, following a 0.82 percent jump overnight.
Sterling was 0.05 percent higher at $1.21640, after rallying 1.06 percent on Wednesday.
Cryptocurrency bitcoin rose 1.33 percent to $23,081.18, after a more than 8 percent surge the previous session.
By Kevin Buckland and Rae Wee