Dollar extends post-Fed rebound; sterling hit by fiscal worries

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The dollar strengthened on Friday, extending its rebound against most major currencies, as traders reviewed the near-term outlook after the Federal Reserve cut interest rates this week but signaled gradual easing in the future.

The U.S. Dollar Currency Index, which tracks the greenback against six major peers, rose 0.3% to 97.662. The gauge, which fell 1% on Monday and Tuesday on expectations the Fed might flag a rapid series of rate cuts, was about flat for the week.

On Wednesday, the Fed delivered an expected rate cut but signaled little urgency to lower borrowing costs quickly in the coming months. The Fed's rate forecast, or the so-called "dot plot," showed projections of two more rate reductions this year.

"It's really a week of two halves," said Marc Chandler, chief market strategist at Bannockburn Forex. "The votes, the actual dots, were not as dovish as the statement and the concerns about the labor market suggested."

The U.S. currency may have room to rebound further after facing selling pressure in the days ahead of the Fed decision.

"What we're telling our clients is that this is just a counter-trend move. If you have to sell dollars, you'll have a better level shortly," Chandler said.

STERLING SLIDE 

Sterling fell on Friday after Britain's borrowing surged past official forecasts, further complicating the country's fiscal outlook, while the yen firmed after the Bank of Japan held rates steady, with dissent on the board.

The pound was one of the worst performers among G10 currencies, mirroring investors' concerns that British finance minister Rachel Reeves may not be able to keep her budget under control.

The currency eased 0.6% to $1.3468, on pace for its biggest two-day drop since early April.

"Despite a better reading from UK August retail sales data, poor UK government borrowing data have highlighted the difficulties Chancellor Reeves faces in delivering the UK budget in November," said Jane Foley, head FX strategist at Rabobank.

Data published early on Friday showed British retail sales rose by a stronger-than-expected 0.5% in August, helped by sunny weather, but sales growth in July was revised slightly down.

The borrowing figures - the highest for the first five months of a financial year since 2020 - could pave the way for further tax increases.

Even before Friday's data, Reeves had been expected to announce new tax increases in her November 26 budget to stay on track to meet her fiscal rules and avoid fresh upheaval in financial markets.

BOJ DISSENT UNDERPINS YEN 

In the BOJ, the unexpected dissent by two board members against the decision to hold rates steady unsettled investors and shifted their focus back on how soon the BOJ will next raise rates.

"This was unexpected, and suggests that perhaps policy rate hikes may be coming sooner than anticipated," said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore.

The Japanese central bank's next meeting on October 30 will be the "best chance" for a rate hike for the rest of 2025, he added.

After a volatile session, the yen was nearly unchanged on the day at 147.975 against the dollar.. 

Investors remain unsure whether the BOJ's policy path will be affected by the October 4 leadership race in Japan's ruling Liberal Democratic Party to replace outgoing Prime Minister Shigeru Ishiba.

The New Zealand dollar extended its slump from the prior session, falling 0.4%, a day after a strikingly weak reading on the economy pushed yields sharply lower as markets ramped up wagers for bigger rate cuts ahead.

Cryptocurrency bitcoin <BTC=> was 2% lower at $115,379. 

(Reporting by Sqib Iqbal Ahmed; Additional reporting by Gregor Stuart Hunter and Sara Rossi Editing by Shri Navaratnam, Jacqueline Wong, Amanda Cooper, Kim Coghill, Gareth Jones, Andrew Heavens and Richard Chang)