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Dollar Rises, March Fed Cut Bets Unwind, Euro at 7-Week Low

  • Powell calls March unlikely, spurring shift in wagers to May
  • Yen firm after US yields drop on regional bank worries
  • Sterling falls before Bank of England policy decision
  • Crown weakens after Riksbank meeting

TOKYO/LONDON, Feb 1 (Reuters) - The euro hit a seven-week low on Thursday as the dollar rose after Federal Reserve Chair Jerome Powell pushed back against bets of a U.S. rate cut as soon as March, and as traders processed market jitters about U.S. regional lenders.

The euro fell to $1.0780, its lowest since Dec 13, and was last down 0.2% at $1.07975, while the pound lost 0.3% to $1.2649 ahead of a Bank of England policy decision later in the day.

That left the U.S. dollar index - which measures the currency against a basket of six major peers including the euro, yen and British pound - up 0.06% at 103.68

It remains close to the recent high of 103.82 touched on Monday of this week and Tuesday of last week, and previously not seen since Dec. 13.

The dollar has been buoyed by U.S. economic data suggesting the Fed can wait longer before cutting interest rates, and Powell gave the currency another push overnight by calling a cut in March "not the base case."

"I don't think it's likely the committee will reach a level of confidence by the time of the March meeting" to ease policy, "but that's to be seen," Powell said at a news conference after Fed officials left rates unchanged but dropped a longstanding reference to possible further hikes in borrowing costs.

"The objectives were not to feed March rate cut expectations and keep the (rate setting ) Federal Open Market Committee's options open, and I think they’ve done both of those very well," said Derek Halpenny head of research global markets EMEA at MUFG.

The Fed outcome sent U.S. Treasury yields lower, reinforcing a rush to bonds driven by renewed jitters over regional U.S. banks after New York Community Bancorp crashed 37% to the lowest in over two decades after posting a surprise loss.

The two year U.S. Treasury yield shed 13 basis points on Wednesday and was steady on Thursday at 4.23%.

In currency markets that could be seen in the rate sensitive and haven Japanese yen. The dollar was down 0.15% at 146.7 yen, after touching a two week intraday low overnight.

"Dollar yen wouldn’t where it is without what’s happening (with U.S. regional banks)," said Halpenny.

"It was certainly striking that the biggest move in UST yields was hours before the FOMC rather than after," said Sean Callow, a foreign-exchange strategist at Westpac.

However, "if markets regard the knee-jerk response to the regional bank news as an over-reaction, then the less dovish FOMC will be the key story in coming days, supporting the U.S. dollar," he added.

It is the Bank of England's turn on Thursday, and it announces its rate decision at midday GMT. No change in rates is expected and the focus will be on how much policy makers acknowledge inflation is slowing, and how cautious they are about hinting rate cuts are imminent.

Markets currently are priced for a two thirds chance that the BoE cuts rates in May, but this may feel too soon for the BoE.

"If the Fed is pushing back on March, the ECB pushing back April, it is reasonable that the BoE pushes back on May," said Halpenny.

The other rate decision on Thursday was from Sweden's Riksbank, which kept its key interest rate unchanged at 4.00% as expected. But the bank said that if inflation continued to slow it might be able to bring forward the timing of a first rate cut, possibly even to the first half of 2024.

Sweden's crown weakened after the decision and the euro was last up 0.3% at 11.276 crowns.

Reporting by Kevin Buckland; Editing by Jamie Freed and Sam Holmes, William Maclean

Source: Reuters

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