Dollar Edges Down As Impact Of Hawkish Fed Commentary Fades

The dollar edged down against most major currencies on Thursday as the positive impact of hawkish Federal Reserve comments faded and investors waited for more signs on the data front to confirm that more large rate hikes to curb inflation were coming.

The Bank of England raised interest rates by the most since 1995, but sterling fell as the central bank warned that a long recession was on its way with inflation seeing toping 13%.

Fed officials have continued to push back against the perception that U.S. interest rates were close to peaking. San Francisco Fed President Mary Daly and Minneapolis Fed President Neel Kashkari voiced their determination overnight to rein in high inflation.

But the impact of the hawkish rhetoric on the dollar appeared to be fading, with the currency in a more defensive mood as the London session wore on.

"Yesterday we had some hawkish comments, but maybe that's not enough and investors will be looking for confirmation from data, especially tomorrow's payrolls number," said ING currency strategist Francesco Pesole, referring to U.S. jobs data.

"The effect on the dollar is fading today. Risk sentiment is also more upbeat and it doesn't look like markets are too worried about the Taiwan situation."

A visit by U.S. House of Representatives Speaker Nancy Pelosi to the self-ruled island led to increased tensions between Washington and Beijing, which regards Taiwan as its sovereign territory.

The dollar index, which measures its performance against six peers, was at 106.36, down about 0.2% but holding above a one-month low hit earlier this week.

The euro was up 0.11% at $1.0178. The dollar was 0.16% firmer against the yen at 134.03 yen.

The dollar's strength has yet to peak, a Reuters poll released on Thursday showed. Of those polled, 70% thought the dollar had some room to rise further in this cycle, even after its index hit its highest level in two decades in July.

Money markets price in a 50 basis point hike at the Fed's September meeting, and a roughly 44% chance of another massive 75 bps increase. The Fed hiked rates by 75 basis points at its meeting in June and July.

Britain's pound fell after the BoE meeting and was last down almost 0.5% at $1.2090. The BoE hiked rates by 50 basis points to 1.75% - the highest level since late 2008 - but issued a recession warning.

"No surprise in the headline decision to hike the interest rate by a 0.50% increment," said Sam Cooper, vice president, market risk solutions at Silicon Valley Bank.

"However, the bleak outlook for GDP and rising inflation forecasts included in the meeting minutes have dampened market confidence and this has translated into a weaker sterling."

Risk currencies rallied as some nerves over Pelosi's visit subsided.

The Australian dollar was at $0.6964, up 0.3%. New Zealand's currency was also 0.3% higher at $0.6292