Dollar takes a breather, pound gains ahead of BOE meeting

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By Tom Westbrook and Ankur Banerjee

SINGAPORE (Reuters) - The U.S. dollar eased slightly on Thursday as investors digested the possibility that Federal Reserve may raise interest rates further than expected, while sterling edged higher ahead of the Bank of England policy meeting.

The Fed on Wednesday raised its benchmark funds rate by 75 basis points (bps) to 3.75-4% as widely expected. The dollar initially fell on hints in the Fed's statement of smaller hikes ahead, but regained strength after Chair Jerome Powell said that the battle against inflation will require borrowing costs to rise further.

"Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected," Powell told reporters, adding: "It is very premature to be thinking about pausing... we have a ways to go."

The hawkish stance from Powell dashed hopes of a pivot to a less aggressive stance and saw the dollar hit a week-high of $0.9810 per euro in early Asia trade. But the greenback lost some steam through the day and was last trading at $0.983.

"We are seeing a slight pullback in dollar after the big moves yesterday," Alvin Tan, head of Asia FX strategy, RBC Capital Markets, pointing out that market activity was muted as a result of a public holiday in Japan.

Tan said for the Fed bringing down inflation is more important than supporting economic growth and the central bank will keep on tightening.

"They are going to reduce the pace but keep on tightening," he added, noting that this was not something new but pushes back the growing narrative of a Fed pivot because of slowdown in growth.

The U.S. dollar index fell 0.214% at 111.880, coming off a session high of 112.19, its highest in seven sessions.

The slight retreat in dollar is unlikely to last long.

"Strong hawkish messaging from the Fed chair pours cold water on premature dovish pivot expectations," said analysts at Citi, who recommend staying long the U.S. dollar in Asia.

"This shall further embolden expectations of policy divergence with a much hawkish Fed relative to other central banks around the world. Further tightening of financial conditions shall put downward pressure on risk assets and strengthen the dollar."

Meanwhile, the pound was last trading at $1.1412, up 0.20% on the day ahead of the Bank of England meeting, when the central bank is on track to raise interest rates by three quarters of a percentage point to 3%, its biggest rate rise since 1989.

"The risk is that the BoE maintains the current pace of tightening and delivers a 50 bps hike," said Commonwealth Bank of Australia (OTC:CMWAY) analyst Kim Mundy. "A 50 bps hike would be considered 'dovish' by market participants and can push sterling lower."

Japan's yen remained notably firm and has held at 147.24 per dollar as traders continue to watch for any more official interventions for the battered currency.

Japan spent a record $42.8 billion propping up the yen last month via a series of unannounced yen purchases, on top of almost $20 billion spent in September.

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Currency bid prices at 0442 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar $0.9829 $0.9816 +0.13% -13.55% +0.9839 +0.9810

Dollar/Yen 147.3100 147.7600 -0.31% +28.06% +147.9900 +147.2950

Euro/Yen 144.79 145.23 -0.30% +11.11% +145.3500 +144.6800

Dollar/Swiss 1.0018 1.0032 -0.12% +9.85% +1.0040 +1.0006

Sterling/Dollar 1.1410 1.1390 +0.21% -15.61% +1.1421 +1.1377

Dollar/Canadian 1.3687 1.3715 -0.20% +8.26% +1.3724 +1.3683

Aussie/Dollar 0.6365 0.6348 +0.25% -12.45% +0.6372 +0.6325

NZ 0.5832 0.5819 +0.28% -14.75% +0.5838 +0.5799

Dollar/Dollar

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ