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Prospect of further dollar weakness

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Dollar index hit lowest in more than a year

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Domestic data supports Australian, New Zealand currencies

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Sterling jumps after BoE

(Adds Sterling after BoE)

By Stefano Rebaudo

Sept 19 (Reuters) - The U.S. dollar dropped on Thursday

after the Federal Reserve cut its interest rate by 50 basis

points and revised its monetary policy outlook, with sterling,

the Australian dollar and the Norwegian crown outperforming

their peers.

Expectations had drifted towards a dovish outcome in the

days before the Fed's decision on Wednesday, with money markets

pricing around a 65% chance of a 50 basis point (bp) cut.

Economists polled by Reuters were leaning towards a 25-bp cut.

"The Fed's decision was quite dovish, which bodes well with

a rebound in risk and further near-term U.S. dollar weakness,"

said Lefteris Farmakis, forex strategist at Barclays.

"The bar, however, is quite high to lean on the Fed for more

dollar weakness further out," he added. "The Fed easing cycle

that markets are pricing in is quite significant."

Money markets priced in 70 bps of additional rate cuts in

2024 and 191 bps by September 2025.

The dollar index, which measures the dollar against a

basket of six peers, was down 0.33% to 100.68. It slid to its

lowest in more than a year of 100.21 in the previous session.

The big news is "the trimming of growth forecasts and the

sharp downward revision of the dots," said Guy Stear, head of

developed markets strategy at the Amundi Investment Institute.

"The Fed seems confident that it has won the battle against

inflation, and recognises that monetary policy is now too

restrictive, especially given the threats to growth."

Fed policymakers on Wednesday projected the benchmark

interest rate would fall by another half of a percentage point

by the end of this year, a full percentage point next year and

half of a percentage point in 2026, though they said the outlook

that far into the future was uncertain.

The pound hit its highest since March 2022 versus the dollar

after the Bank of England's Monetary Policy Committee (MPC)

voted 8-1 to keep rates on hold, with only external member Swati

Dhingra voting for a further quarter-point cut.

Sterling was up 0.60% against the greenback at $1.3287

after reaching $1.3314. It was up around 0.4% before

the BoE.

It also rose versus the euro, up 0.2% at

84.00 pence and the yen, up 1.12% at 190.04.

The Australian and New Zealand dollars drew support from

domestic data surprises.

Australian employment exceeded forecasts for a third

straight month in August.

The data "should dispel thoughts of imminent easing from the

Reserve Bank of Australia (RBA)," said Robert Carnell, regional

head of research, Asia-Pacific, at ING.

"Until recently, there was an odd kink in the implied cash

rate curve at the September meeting, indicating that some

investors still believed the RBA would follow the Fed lower this

month," he added.

The Aussie was up 0.86% to $0.6822.

"The Australian dollar can receive short term support thanks

to the Fed's dovish approach," Barclays' Farmakis said. "The

economy's reliance on China and slow growth outside the U.S.,

however, raise doubts on the sustainability of the rebound."

The kiwi, meanwhile, traded 0.74% higher at

$0.6253, after data showed the New Zealand economy contracted by

0.2% in the second quarter, compared with the 0.4% fall

expected.

Against the yen, the dollar was 0.50% higher at

142.99.

Some analysts flagged a squeeze in short dollar/yen

positions as markets took profit post-Fed.

The euro was up 0.35% to $1.1157, but remained

below a three-week high hit in the previous session.

The Norwegian crown rose in London trade and strengthened

slightly after the central bank kept rates on hold but said it

planned to cut in 2025.

It was last up 0.50% at $10.4550 and up 0.93% at

11.66 versus the single currency.

"The statement shifts the dial only very slightly in a

dovish direction," said Andrew Kenningham, chief Europe

economist at Capital Economics.

"Policymakers also emphasised that the krone has depreciated

and made it clear that this is the key factor keeping them in

hawkish mode," he added.