The dollar fell sharply after a US Federal Reserve statement accompanying its latest rate rise suggested that US interest rates may be close to peaking
The Fed last night raised interest rates by a further quarter point to 4.25 pct as expected but made significant changes to the wording of its accompanying statement, dropping the reference to monetary policy being "accomodative"
"The linguistic shifts contained in the Fed statement appear to have been interpreted as indicative of a softening in the policy profile," said HBOS analyst Steve Pearson
Interest rate futures markets are now pricing in a peak in US interest rates between 4.50 and 4.75 pct, he added
The news put the dollar under pressure as it hit six-week lows against the euro and came close to five-week lows against the yen
Nevertheless, analysts are sceptical about just how dovish the statement really is. The Fed stressed that "further measured policy firming is likely to be needed", suggesting that future rate hikes will be dependent on economic data, which so far have remained very firm Pearson noted in particular the fact that the Fed has begun to highlight the potential emergence of resource constraints as an upside inflation risk
"The rates market is constantly looking for a top in rates at a time when we sense data are about to set the Bernanke Fed worrying about capacity utilisation driven price pressures," he said The yen was also sharply higher against the dollar after initially falling overnight in response to a weaker-than-expected Japanese Tankan survey
The headline index -- showing sentiment among large manufacturers, the core driver of the world's second-largest economy -- stood at 21 in December, up from 19 in the September survey and improving for the third consecutive quarter, but was below the consensus call of 23. The yen's gains are partly related to the sharp fall in the gold price, with Japanese investors seeking out alternative safe haven investments, selling gold and creating subsequent offers in dollar/yen, HBOS' Pearson said