The dollar index retreated on Thursday after nearing 2023's peak on post-Fed follow-through, as EUR/USD was steady, USD/JPY and yen crosses fell amid risk-off flows and sterling weakened when the BoEsomewhat surprisingly refrained from raising rates for the first time since December 2021.
EUR/USD fell as far as 1.0617, its lowest since March, but reversed just above the 38.2% Fibo of the 2022-23 uptrend 1.0608, as Treasury yields failed to hold the fresh highs they hit after an unexpected fall in U.S. jobless claims.
Two-yr Treasury yields gave up much of their early gains as the selloff in stocks provided negative feedback as to what higher-for-longer rates could do to asset prices and the wealth effect that feeds into spending, growth and inflation.
There were also ECB policymaker remarks warning rates might need to be raised again at the next meeting.
Sterling was down 0.38% but had recovered from the worst of the day's losses that resulted in a six-month low of 1.2231 that was well below May's swing low and the 61.8% Fibo of this year's recovery.
The day's biggest winner was the haven yen which gained 0.6% against the dollar, 0.5% on the euro and nearly 1% versus sterling and Aussie.
The broadening central bank message, aside from the BoJ's, of keeping rates higher for longer sent stock markets and risk appetite into retreat, with the extraordinarily low-yielding yen a prime funding currency for carry trades.
USD/JPY earlier made a new 2023 high at 148.465 on EBS due to surging Treasury-JGB yield spreads before diving to its lowest in five days amid the risk-off flows.
Ongoing MoF threats to support the yen against excessive volatility and risk management ahead of Friday's BoJ meeting and Japan's CPI report also favored consolidation of the uptrend.
USD/CNH rose 0.07% as worries about global growth given major central banks' higher-for-longer guidance sent Chinese stocks to 10-month lows and weighed on copper.
Other than Japan's August inflation report, Friday's main data events will be UK retail sales and global flash PMI readings for September.
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