Dollar on front foot after Fed signals no rush to cut rates

The US dollar held steady against the euro on Thursday following its biggest rise in two weeks a day earlier, when the Federal Reserve warned of rising risks to the economy from higher inflation and unemployment.

The dollar was also supported by the prospect of a de-escalation in trade tensions between Washington and Beijing, with investors closely watching for developments ahead of a planned meeting in Switzerland on Saturday.

On Wednesday, the Federal Open Market Committee (FOMC) left interest rates unchanged, as widely expected, but Fed Chair Jerome Powell said it is not clear if the economy will continue its steady pace of growth or wilt under mounting trade uncertainty and a possible spike in inflation.

"It's not at all clear what the appropriate response for monetary policy is at this time," Powell said. "It's really not at all clear what it is we should do."

Markets currently price three quarter-point rate cuts by year-end, with the next coming in July or September.

The dollar traded little changed at US$1.1313 per euro early on Thursday in Asia, after climbing 0.56 per cent on Wednesday to snap a three-day losing run.

The US currency was flat at 143.79 yen, and steady at US$1.3298 versus sterling, with the Bank of England widely expected to announce a quarter-point rate cut later in the day.

The US dollar index, which measures the greenback against those three currencies and three more major peers, was stable at 99.84 after rising 0.26 per cent on Wednesday.

"The FOMC does not want to pre-empt changes in the US economy – it wants to wait for 'hard' economic data to guide its policy actions," said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia.

"From here, we expect communication from Chair Powell and other FOMC members to focus on making sure inflation expectations are anchored," he said. "There is a risk public statements lean hawkish."

Signs the world's top two economies would engage to defuse the standoff on tariffs also helped dollar sentiment. US Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer are due to meet China's economic tsar, He Lifeng, on Saturday.

President Donald Trump suggested on Wednesday that China initiated the talks, and said he was not willing to cut tariffs on Chinese goods to nurture negotiations.

The Chinese yuan was little changed at 7.2235 per dollar in offshore markets, following a 0.26 per cent decline on Wednesday.

The Australian dollar, which often acts as a liquid proxy for the yuan due to the antipodean nation's close trade ties with China, traded at US$0.6433, following a more than one per cent slide a day earlier.

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