Dollar plunges to 3-month low vs yen as Powell says Fed to go slow

The dollar tumbled to a three-month low versus the yen on Thursday as traders focused on comments by Federal Reserve Chair Jerome Powell that interest rate hikes could be scaled back "as soon as December."

Powell said on Wednesday that "slowing down at this point is a good way to balance the risks" but added that controlling inflation "will require holding policy at a restrictive level for some time".

The greenback last stood down 0.98% at 136.755 yen JPY=EBS, having plunged as much as 1.2% earlier to 136.50 -- its lowest level since 26 Aug. The dollar-yen pair is extremely sensitive to changes in long-term US yields.

The 10-year yield US10YT=RR fell after Powell's comments to hit a near two-month low overnight at 3.6%. It last stood at 3.6275% in Tokyo.

"Obviously the speech was less hawkish than feared," said Rodrigo Catril, senior FX strategist at National Australia Bank.

"The yen is leading the charge, and that makes sense when you look at the big, big move in long-term US rates."

However the market reaction "is somewhat surprising," Catril added. "The Fed chair really just reiterated the view of late, which is a smaller hike should be expected next week, but he re-emphasized they're not done yet and we should be expecting a much higher terminal rate."

Markets are currently pricing in a 91% probability that the Fed increases rates by 50 basis points on 14 Dec, and see a 9% chance of another 75-basis-point hike that day. The peak is seen below 5% around May. 

In November, the dollar dropped 7.15% versus the yen, its worst month in 14 years, as investors positioned for a Fed pivot.

The dollar index =USD - which measures the currency against six major peers including the yen and euro - extended Wednesday's more than 1% drop into Thursday, dipping a further 0.09% to 105.69. It tumbled 5.2% in November, its worst monthly showing since September 2010.

The euro EUR=EBS rose 0.21% to $1.04325, heading back toward the five-month high of $1.0497 marked at the start of this week.

The gains came even as a European survey on Wednesday showed euro zone inflation easing far more than expected in November, raising hopes that price growth is past its peak and bolstering the case for slower tightening by the European Central Bank.

Sterling GBP=D3 added 0.23% to $1.2086, edging toward last week's three-month peak of $1.2153.

The risk-sensitive Antipodean currencies also gained, with the Aussie dollar AUD=D3 last 0.15% stronger at $0.6799, after earlier touching $0.68155 for the first time since 13 Sept. New Zealand's kiwi NZD=D3 added 0.37% to $0.6320 after touching $0.6325, the highest since 17 Aug. 

The Aussie and kiwi have also been buoyed by signs the Chinese government will relent on its zero-Covid policy.

The giant Chinese cities of Guangzhou and Chongqing announced an easing of Covid curbs on Wednesday, while officials in Zhengzhou, the site of a big Foxconn factory making Apple iPhones that has been the scene of worker unrest over Covid, also announced the "orderly" resumption of businesses.

In cryptocurrencies, bitcoin BTC=BTSP stuck close to Wednesday's two-week high of $17,223, last changing hands at around $17,133. Ether ETH=BTSP traded at around $1,283, not far for the previous session's nearly three-week peak of $1,310.