FOREX-Dollar close to multi-year lows as Fed provides limited support

By Stefano Rebaudo

Jan 29 (Reuters) - The dollar edged up on Thursday but remained near multi-year lows, with a mildly hawkish Federal Reserve providing little support to the currency as worries over U.S. policy kept weighing on sentiment.

The greenback ended last week with its biggest fall since last April as investors have grown increasingly nervous about their exposure to U.S. assets, amid concerns about the U.S. policy over Greenland.

Trump said on Tuesday the value of the dollar was "great", when asked whether he thought it had declined too much, adding to pressure on the U.S. currency which hit a four-year low.

The greenback turned higher, breaking a four‑day run of losses, on Wednesday after Treasury Secretary Scott Bessent reaffirmed the U.S.' preference for a strong currency, but failed to keep momentum on Thursday.

Federal Reserve Chair Jerome Powell signalled a prolonged wait before any further reductions in borrowing costs, and some economists say the U.S. economy shows little need for additional policy easing.

"While the outlook remains uncertain, particularly given the appointment of a new Fed Chair in coming months, our baseline remains that the rate cutting cycle is complete, as labour improvement lies ahead," said David Doyle, head of economics at Macquarie Group.

"We see the next move as a hike, potentially occurring in the fourth quarter of 2026."

The dollar's performance will hinge crucially on how issues around Fed independence play out, including a U.S. Supreme Court ruling on Trump's bid to fire Fed Governor Lisa Cook.

Against a basket of currencies, the dollar was up 0.1% at 96.33 =USD, near Tuesday's four-year low of 95.566.

EURO BACK IN THE ECB SPOTLIGHT

The euro EUR=, which broke above the key $1.20 level on the back of the dollar's decline, traded just below that at $1.1948 after European Central Bank (ECB) policymakers flagged growing concerns over the deflationary effect of its quick appreciation.

"Although the euro/dollar stayed well above the ECB’s base scenario last year without triggering strong disinflation risk, trade uncertainty persists," said Geoff Yu, EMEA macro strategist at BNY.

Economists flagged that the strength of the euro could amplify the deflationary effect of China’s export machine and jolt the ECB out of its "good place" and into more interest rate cuts.

"Forecasts may change, the December staff projections indicate that a euro/dollar at 1.25 would clearly breach the option-implied density range – that is, a full overshoot and potentially enough to trigger a change in guidance," said Geoff Yu, EMEA macro strategist at BNY.

ECB board member Isabel Schnabel reiterated on Wednesday monetary policy was in a 'good place' and interest rates are expected to remain at their current levels for an extended period while financial markets are pricing steady rates through early 2027.

Meanwhile, some strategists flagged that the usual euro/dollar–rate‑differential correlation has collapsed after Trump took office, and warned that even an ECB rate cut could do little to shift a market increasingly driven by macro and geopolitical risks rather than relative policy rates.

JAPAN'S FISCAL POLICY STILL IN FOCUS

The dollar slide has provided some reprieve for the ailing yen JPY=, which was flat at 153.40 per dollar on Thursday.

The yen has tracked around the 152 to 154 per dollar range for most of this week thanks to talk of rate checks from the U.S. and Japan last week - a move often seen as a precursor to intervention.

Goldman Sachs said in a note that the prospect of coordinated action by Japan’s Ministry of Finance and the U.S. Treasury should curb near‑term downside pressure on the yen, but warned the impact would only last if backed by disinflation‑friendly fundamentals such as quicker Bank of Japan tightening or fiscal restraint.

The Australian dollar AUD=, which has drawn additional support from bets of a rate hike at home as soon as next week, scaled a three-year peak and was last roughly unchanged at $0.7038.