Dollar slightly pares losses after Fed rate cut

The U.S. dollar slightly pared losses on Thursday after the Federal Reserve cut interest rates by 25 basis points, as was widely expected, with policymakers taking note of a job market that has “generally eased” while inflation continues to move towards the U.S. central bank’s 2% target.

The dollar index was last down 0.49% at 104.59, while the euro gained 0.44% to $1.0775. The greenback was down 0.85% at 153.31 Japanese yen.

Traders were also seen as closing out profitable bets on a Donald Trump presidency after his election victory on Tuesday.

Republicans also won the Senate majority, putting the party on track for a clean sweep that would allow it to make larger legislative changes. They are leading the race to win the House of Representatives, though this has yet to be decided.

Trump is expected to clamp down on illegal immigration, enact new trade tariffs, maintain or introduce new tax cuts and loosen business regulations, which analysts see as boosting growth and inflation. That would send Treasury yields and the dollar higher and has also fueled speculation the Fed might reduce rates at a slower and shallower pace.

The dollar index hit a four-month high of 105.44 on Wednesday as investors priced in Trump policies. It dipped to 104.33 on Thursday, down 0.74% on the day, as investors closed out some election bets.

“In the three weeks prior to the election there was a lot of dollar buying and positioning was already quite long the dollar, so I think today’s reversal is probably explained by some of these red sweep trades that were put on before the election maybe being partially squared,” said Serebriakov.

Serebriakov added that further large gains in the U.S. currency may be unlikely before the impact of new policies including tariffs is felt over the coming two years. Sterling rose after the Bank of England cut interest rates by 25 basis points but said it expected UK inflation and growth to pick up more quickly than it had previously anticipated.