Dollar steadies after Powell reiterates caution over further easing

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By Kevin Buckland

TOKYO (Reuters) -The U.S. dollar edged up from its lowest level in close to a week on Wednesday after Federal Reserve Chair Jerome Powell struck a cautious tone on further easing overnight, although traders retained bets for two more interest rate cuts this year.

Australia’s dollar firmed after a hotter-than-expected headline reading of consumer inflation, less than a week before the Reserve Bank’s next policy decision.

New Zealand’s dollar was steady following the naming of a new central bank chief.

The U.S. dollar index, which measures the currency against six major rivals, added 0.1% to 97.361, attempting to claw back some ground after two straight losing sessions that saw it touch the lowest since Thursday at 97.198 overnight.

Markets are priced for quarter-point rate cuts at each of the remaining two Fed policy meetings this year. Another reduction is expected in the first quarter of 2026, broadly aligning with forecasts from Fed officials following a quarter-point cut on Wednesday of last week.

The dollar had bounced back from the lowest level since early 2022 at 96.224 after the Fed’s policy announcement and Powell’s subsequent news conference, which fell short of the market’s more dovish expectations following a recent, sharp weakening of the labor market.

On Tuesday, Powell said the central bank needs to continue balancing the competing risks of high inflation and a faltering job market in future policy decisions, in comments that echoed those from last week. He called the policy dilemma “a challenging situation.”

“Powell’s overnight remarks underscored the central bank’s cautious approach,” said James Kniveton, senior corporate forex dealer at Convera.

“Powell acknowledged the absence of risk-free policy options, warning that premature easing could entrench inflation whilst excessive monetary restriction might unnecessarily damage employment prospects.”

The dollar added 0.2% to 147.88 yen.

Candidates in the race to become the next leader of the ruling Liberal Democratic Party, and ostensibly prime minister, answered journalists’ questions at an event on Wednesday. Sanae Takaichi – one of the frontrunners, known as a fiscal and monetary dove – said that monetary policy is up to the Bank of Japan, but that higher rates could impact mortgage rates and corporate investment.

The BOJ left policy unchanged last week, but a number of hawkish signals spurred analysts and investors to speculate on an earlier resumption of rate hikes.

The euro lost 0.1% to $1.1800, while sterling declined 0.1% to $1.3510.

Australia’s dollar gained 0.3% to $0.6620, reversing an earlier small loss, after the headline reading of the consumer price index (CPI) rose 3% in August compared to a year earlier, up from 2.8% in July and just above median forecasts of 2.9%.

However, the data picture was complicated by a key measure of core inflation easing back to 2.6%.

Traders slightly pared back bets for a rate cut by year-end to about 33%, according to LSEG data. Markets continue to expect no change to policy on September 30.

“The data points to a bit of stickiness in prices that may complicate the RBA’s efforts to cut rates further and support a clearly ailing labour market,” said Kyle Rodda, an analyst at Capital.com.

At the same time, “the data is probably not as bad as it looks” and “the jump in the headline figure was in large part attributed to the roll-off energy subsidies,” Rodda said.

The New Zealand dollar was little changed at $0.5858. 

New Zealand Finance Minister Nicola Willis on Wednesday announced that Swedish central banker Anna Breman has been appointed as the next Reserve Bank governor, making her the first woman in the role. She takes over from December 1.

(Reporting by Kevin Buckland; Editing by Sam Holmes and Lincoln Feast.)