Forex

Dollar slumps as Fed stokes reflation bets

Reuters TOKYO | Updated on February 25, 2021

US Fed policy seen supportive for risk assets for some time

The safe-haven US dollar languished near three-year lows versus riskier currencies on Thursday as continued dovish signals from the Federal Reserve stoked reflation bets.

The greenback sank to fresh lows against the Australian and Canadian dollars, and held near lows set overnight against its British and New Zealand peers. Fed Chair Jerome Powell reiterated on Wednesday that the central bank wouldn't adjust policy until the economy is clearly improving, and will look through any near-term spike in inflation.

The remarks to the House of Representatives Committee on Financial Services mirrored his testimony before the Senate the day before.

"Powell made it very clear that the improvement in the economic outlook thus far will not instigate the Fed to tighten monetary policy," National Australia Bank foreign exchange strategist Rodrigo Catril wrote in a client note.

"The punchbowl ain’t going anywhere anytime soon and the policy backdrop should remain supportive for risk assets for some time."

Easy financial conditions, the promise of fiscal stimulus and an accelerating COVID-19 vaccine roll-out have driven money into what's known as the reflation trade, referring to bets on an upswing in economic activity and prices.

Commodity-linked currencies are placed to benefit from a pick-up in global trade, while investors have also cheered Britain's progress in recovering from the coronavirus pandemic.

"The dollar will probably weaken over time as economies pick-up and the reflation trade gets more attention," said Bart Wakabayashi, Tokyo branch manager of State Street Bank and Trust. "We’re seeing very strong upward pressure on prices in the US in particular."

Australia's dollar traded at $0.79672 after earlier touching a fresh three-year high of $0.7978. The Canadian dollar changed hands at its own three-year high of C$1.2502 per US dollar. The New Zealand was at $0.7434, just off Wednesday's high of $0.7455. Sterling rose 0.1 per cent to $1.4161 after pushing to the cusp of $1.43 overnight for the first time since April 2018.

The euro traded near the top of its recent range at $1.2178, near the almost one-month high of $1.2180 touched earlier this week. The dollar strengthened though against other traditional safe haven currencies, maintaining a two-day gain to trade at105.875 yen and holding near the three-month high of90.945 Swiss francs reached overnight.

Published on February 25, 2021

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