Forex Update: Dollar in defensive mode after Fed signals readiness to cut interest rates

The dollar was on the defensive on Thursday after the Federal Reserve signalled it was ready to lower interest rates to combat growing global and domestic risks.

The Fed on Wednesday left interest rates unchanged as widely expected but said the case for lower rates was building, suggesting it could ease monetary policy as early as next month as it took stock of rising trade tensions and growing concerns about weak inflation.

The dollar index against a basket of six major currencies was little changed at 97.188 after losing more than 0.5% overnight.

"Even though the market had anticipated much of what the Fed said, the dollar`s fall was still a relatively large one," said Daisuke Karakama, chief market economist at Mizuho Bank.

"The main question is no longer if the Fed will cut rates in July, but whether the easing will be by 25 or 50 basis points."

With U.S. yields falling after the Fed meeting, the dollar retreated against the yen. The two-year Treasury yield touched 1.737% on Wednesday, its lowest level since November 2017.

The greenback lost more than 0.3% to brush 107.720 yen, its lowest since Jan. 4, coming under further pressure after Bloomberg reported that U.S. President Donald Trump believes that he has the authority to replace Fed Chair Jerome Powell and demote him to be a board governor.

Immediate focus for the yen was on the Bank of Japan`s monetary policy decision due later on Thursday.

The BOJ is expected to keep its ultra-loose monetary policy unchanged but interest in markets will be on whether the Fed`s dovish tilt would have any bearing on its Japanese counterpart.

The euro stretched overnight gains and advanced 0.2% to $1.1248.

The common currency has managed to bounce off a two-week low of $1.1181 set earlier in the week after European Central Bank President Mario Draghi`s dovish comments sent German bund yields to record lows.

The pound was steady at $1.2652 after gaining roughly 0.7% overnight.

Sterling was buoyant ahead of the Bank of England`s policy meeting later on Thursday, where the central bank may strike a relatively more confident tone than its peers. 

In contrast with the general caution displayed by other major global central banks, the BoE is expected to repeat its intention of raising borrowing costs - Brexit permitting.

The Australian dollar was a touch higher at $0.6885 following a modest gain of 0.1% on Wednesday.