The US dollar rallied in Asian trading on Thursday following cautious signals from the Federal Reserve overnight, sending the pound to a 30-month low against the greenback.

Sterling fell 0.4 per cent to hit $1.2100 in morning trading in Asia, a level not seen since January 2017, against a backdrop of broad dollar strength and persistent uncertainty over the prospect of a chaotic no-deal Brexit under new UK prime minister Boris Johnson.

The pound later pared some of its losses to be down 0.2 per cent.

The dollar index, which tracks the greenback against basket of other major currencies, rose 0.3 per cent to 98.865, its highest level since May 2017. The move came after the US Federal Reserve cut its main interest rate by 25 basis points, defying predictions in some quarters that it would make a more aggressive half-point cut.

Roger Hallam, currency chief investment officer at JPMorgan Asset Management, said on Thursday that the pound’s weakness looked set to continue. “Sterling remains vulnerable to a further escalation in Brexit tensions and we anticipate the market will probably discount higher risks of a ‘no deal’ outcome in the weeks ahead,” he said. 

Traders were also digesting comments by Jay Powell, the Fed chairman, that he viewed the cut as a “mid-cycle adjustment to policy”, implying that the path forward for rate-setters did not necessarily include further easing. 

“It is the currency market, via a stronger US dollar, where much of the disappointment [over hawkish signals from the Fed] will be played out,” said Seema Shah, chief strategist at Principal Global Investors, adding that easing by the European Central Bank last month looks set to spur further dollar strength. 

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Other major currencies also fell, with the Japanese yen losing 0.4 per cent to climb past the ¥109 mark against the dollar, and the euro shedding 0.3 per cent. 

Elsewhere, China’s renminbi weakened 0.3 per cent, taking it beyond the Rmb6.9 mark against the greenback for the first time in a month.

Market sentiment remained cautious after trade talks between the US and China concluded on Wednesday with few signs of a breakthrough. 

But the pound’s underperformance has stood out, with today’s lows representing a 4.7 per cent fall in July alone.

Analysts were divided on the future direction of the British currency: some suggested the pound’s recent slide was overstatingthe risk of a no-deal Brexit. 

“In our view, in the near-term sterling is oversold and in our foreign exchange strategy we overweight the British pound versus the US dollar,” said Mark Haefele, chief investment officer at UBS.

Others speculated that the long-term trajectory for the pound would be downwards, even if the near-term outlook is determined mainly by twists in the Brexit saga.

“What the valuations data do suggest, though, is that the currency is not yet fundamentally low, despite recent falls,” said Oliver Jones, senior markets economist at Capital Economics.

“That in turn indicates that it is unlikely to do especially well over the longer term — the next half-decade or more — even if a no-deal Brexit on October 31 is avoided,” Mr Jones added.

Via Financial Times