(Bloomberg) -- The Federal Reserve may have telegraphed a higher peak for US interest rates, but at least one investor expects it to be more cautious about tightening from here.

M&G Investments, which has been reducing long greenback bets, reckons the Fed is entering the “second phase” of its hiking cycle. The new chapter sees the US central bank taking into account its recent rate increases and the lags with which monetary policy affects economic activity. 

“While the Fed remains data dependent and committed to fighting inflation, it is likely to exert more caution with interest-rate increases going forward,” said Pierre Chartres, fixed-income investment director in Singapore. “We have been reducing our USD exposure for funds that take FX risks and also gradually adding back US duration over time.”

The dollar has been on a tear this year as the Fed jacked up interest rates aggressively, but its fate now hangs in the balance as traders try to get a handle on the outlook for US policy. Fed Chair Jerome Powell whipsawed markets on Wednesday when he said officials were monitoring the lagged effect of policy, before quickly adding that it was “very premature” to think about pausing the tightening cycle.

The greenback fell against all its Group-of-10 peers on Thursday in a possible sign that investors may be reassessing Powell’s remarks.

Before Wednesday’s rate decision, strategists at TD Securities noted that the dollar’s sensitivity to rate hikes has decreased, while National Australia Bank Ltd. said it’s the pace and “journey” of the Fed’s hiking trajectory -- rather than the final terminal rate -- that would determine the US currency’s fortunes. 

M&G, which oversees about $440 billion in assets, has also been adding US duration to portfolios as Treasury yields climbed. While US yields may edge up from here, “the picture does seem more balanced now given the adjustment in monetary policy that has already happened,” said Chartres. 

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