Dollar just below recent peaks as investors eye Fed meeting

by Jonathan Adams

The greenback has been rising broadly for over a month as markets are wary of the Fed starting to taper its monetary support

The U.S. dollar was just below recent peaks on Tuesday, as investors turned their attention to this week’s Federal Reserve meeting for clues on the policy outlook.

The dollar had dropped nearly 0.3% against the euro overnight.

But the greenback has been rising broadly for over a month as markets are wary of the Fed starting to taper its monetary support, and data shows investors are now long dollars for the first time since March 2020.

The dollar stood at $1.1809 per euro and bought 110.27 yen early in the Asia session. The Australian and New Zealand dollars held on to modest overnight gains.

The Fed meeting is on Wednesday and the focus is on discussions around bond purchases and insight into the bank’s comfort with surging inflation, with the upshot for currency markets not clear cut.

Commonwealth Bank of Australia strategist Joe Capurso said a hint that tapering could soon begin would lift the dollar.

Steve Englander, head of G10 FX research at Standard Chartered, however, said that a steer on the Fed’s thinking about a sharp but likely transitory jump in inflation will be just as important.

We expect that Fed Chair Powell will convey more patience than many recent Fed speakers about bringing inflation lower, as long as domestic economic conditions still point to labour market slack, said Englander in a note to clients.

A dovish lean by Powell will likely push up longer-term interest rates because of a rally in inflation breakevens and a reduction in market fears about slower medium-term growth, he said. Paradoxically, this is likely to be dollar-negative because global uncertainty on the policy response to higher inflation would be reduced.

A tick higher in inflation expectations on Monday pushed U.S. 10-year real yields to a record low of -1.123%, which also contributed to overnight softness in the dollar.

The U.S. dollar index dropped 0.3% overnight and was last steady at 92.584.

The risk-sensitive Australian dollar was steady at $0.7382 and the kiwi at $0.7000.

Sterling was above its 20-day moving average and near a one-week high at $1.3827 as early data seemed to show COVID-19 cases in Britain were dropping.

The Chinese yuan has held up despite turmoil in equities and was steady at 6.4790 on Tuesday while investors awaited industrial profit figures due at 0130 GMT.

This article is for information purposes only.
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