Dollar falls to 3-month low vs yen on Powell remarks on Fed slowing

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By Kevin Buckland and Alun John

TOKYO/LONDON (Reuters) - The dollar tumbled more than 1.5% to a three-month low against the yen on Thursday, after comments by Fed Chair Jerome Powell that U.S. rate hikes could be scaled back "as soon as December" though the euro failed to climb past a major resistance level.

The aggressive pace of Federal Reserve rate increases this year has sent the dollar soaring, thanks to higher U.S. yields and fears the central bank would push the U.S. economy into recession in its attempts to combat inflation, but Powell said on Wednesday that "slowing down at this point is a good way to balance the risks".

He did add, however, that controlling inflation "will require holding policy at a restrictive level for some time".

The greenback tumbled as much as 1.64% to 135.85 yen, its lowest level since August 23, but then recovered a little to 136.38.

The dollar-yen pair is extremely sensitive to changes in long-term U.S. Treasury yields, which fell after Powell's comments to a near two-month low overnight of 3.6%. They last stood at 3.6237%.

"Obviously the speech was less hawkish than feared," said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:NABZY). "The yen is leading the charge, and that makes sense when you look at the big, big move in long-term U.S. rates."

However, the market reaction "is somewhat surprising", Catril said. "The Fed chair really just reiterated the view of late, which is a smaller hike should be expected (at the next meeting on Dec. 14), but he re-emphasized they're not done yet and we should be expecting a much higher terminal rate."

Markets are pricing in a 80% probability that the Fed increases rates by 50 basis points at the next meeting, versus a 20% chance of another 75-basis-point hike according to CME's Fedwatch tool.

Both the euro and sterling also gained, but failed to break through recent resistance levels.

The euro was up 0.2% $1.0432 having traded as high as $1.0463 early in the day. The pound was at $1.2114 up 0.46%.

"The next important resistance level for euro/dollar comes in at the 1.0500-level which has held so far this month. A break above that level could open the door to an extended rebound up towards the late May/early June highs at around the 1.0800-level," said MUFG analysts in a note.

The dollar weakened against most other G10 currencies, falling a touch on the Swiss franc while the Australian dollar reached $0.684, the highest since Sept. 13 and the New Zealand dollar touched $0.6341, the highest since Aug. 17.

The Aussie and kiwi have also been buoyed by signs the Chinese government will relent on its zero-COVID policy.

Giant cities Guangzhou and Chongqing announced easings of COVID curbs on Wednesday, while officials in Zhengzhou, the site of a Foxconn factory that is the world's biggest maker of Apple (NASDAQ:AAPL) iPhones and has been the scene of worker unrest over COVID, also announced the "orderly" resumption of businesses.

China's yuan saw some volatility in offshore trading after media reports that the capital Beijing would allow some people to home-quarantine. The dollar was last 0.4% stronger at 7.074 yuan after having weakened as much as 0.3% to a two-week low of 7.0256.