Fed rhetoric restrains dollar as traders eye inflation
The U.S. dollar hovered near its lowest levels of the year on Wednesday as traders hung on to bets that the Federal Reserve would remain steadfast in its easy policy settings ahead of data expected to show a sharp rise in annual U.S. inflation.
Analysts forecast figures due at 1230 GMT to show a 3.6% lift in year-on-year prices, boosted by last April’s low base. The month-on-month forecast is for a modest 0.2% rise.
Higher numbers might add pressure on the Fed to bring forward rate rises, a worry which has contributed to a selloff in rate-sensitive tech shares this week. But currency markets have been soothed by repeated promises of patience from Fed speakers and the dollar has been pressured by gains in commodity currencies.
The greenback touched its weakest in two months against the euro overnight, following a strong European growth survey, and it traded just above that level at $1.2140 early in Asia. The yen fell marginally to 108.79 per dollar.
Sentiment helped the dollar index a fraction higher to 90.278 as selling pressure persisted in stock markets, but that still leaves it just above key support around 89.677 and 89.206.
Commodity currencies cooled their heels near milestone peaks, with the Aussie and kiwi slipping about 0.2% in morning trade to sit just below recent ten-week tops, while the Canadian dollar held just shy of Tuesday’s almost four-year high. [AUD/]
Sterling hung on to recent gains to trade at $1.4118. [GBP/]
“As long as the equity market doesn’t experience a more drastic correction, the dollar is unlikely to get a safe-haven bid,” said Rodrigo Catril, a senior currency strategist at National Australia Bank in Sydney.
“We know now that the Fed is very much firmly committed to easy policy,” he said, a view reinforced by recent comments from Fed members that have made Dallas Fed President Robert Kaplan’s mention of tapering support last month look like an outlier.
“Everybody else has come out firmly saying it’s not the time…and that’s a dollar negative story.”
St. Louis Federal Reserve President James Bullard said on Tuesday he expects inflation could stay as high as 2.5% next year, while Fed Governor Lael Brainard said weak labour data last week shows the recovery has a long way to run.
“Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions,” she said.
Nominal U.S. yields crept higher with the focus on inflation, but real yields remain negative and under pressure.
The U.S. currency is also being weighed down by the improving global growth outlook, which tends to draw investors’ cash to emerging markets, and by big and growing U.S. trade and current account deficits which also send dollars abroad.