Traders expect Powell to provide some reassurance that the Fed will not rush to raise rates, which might calm bond markets and eventually weigh on the dollar
The U.S. dollar nursed losses near a six-week low on Tuesday and commodity-linked currencies hovered around multi-year highs, as investors’ focus shifted to how Fed chief Jerome Powell might respond to resurgent inflation expectations.
Surging prices for materials from oil and copper to lumber and milk powder have pushed the Canadian, Australian and New Zealand dollars to their highest levels in around three years.
However the advances have come with a global spike in inflation expectations and a big sell-off in longer-dated bonds.
Traders expect Powell to provide some reassurance that the Fed will tolerate higher inflation without rushing to raise rates. That might calm bond markets and eventually weigh on the dollar, they said.
I think he will talk up the downside, said Commonwealth Bank of Australia currency analyst Joe Capurso in Sydney.
If anything, I think he will give markets a bit of a cold shower and say: ‘Mr Market you’re getting a bit ahead of yourself. There are plenty of risks…and the U.S. economy is long, long way from full employment.’
Asia trade was dampened by a public holiday in Tokyo, but renewed confidence that low U.S. interest rates will not rise anytime soon could pave the way for further gains in trade-exposed currencies at the dollar’s expense.
Positioning data shows investors overwhelmingly betting that U.S. dollar will continue to drop as the world recovers from the pandemic, even if short holdings have been cut slightly in recent weeks.
The broad dollar retains a heavy tone, expect the dollar index to continue testing the 90.00 support, said OCBC Bank strategist Terence Wu. Selling pressure remains strong for now. We turn slightly more cautious, but if dollar-negative views are still to be expressed, (we) prefer to do it through commodity currencies.
The U.S. dollar index dropped to 89.941 on Tuesday, its lowest since mid-January. The Australian dollar briefly hit its highest since early 2018, buying $0.7934, while the kiwi held steady around $0.7320. The Canadian dollar held just below Monday’s near three-year high.
The euro made a small gain to $1.2167 and is poised to re-test resistance around $1.2220.
Sterling held above $1.40 at $1.4072.
The Japanese yen, which has been the worst performing major currency of 2021 as rising U.S. Treasury yields can draw investment from Japan, steadied at 105.02 per dollar.