Forex

Dollar softens amid bets other central banks to outpace Fed tightening

Reuters TOKYO | Updated on October 19, 2021

Dollar index a shade weaker

The dollar languished near the bottom of its recent range against major peers on Tuesday, knocked back by weak US factory data overnight and on market wagers of faster normalisation of monetary policy in other countries.

The dollar index, which measures the greenback against six peers, weakened 0.05 per cent to 93.894 from Monday. It has oscillated for the past three weeks between 93.671 and the one-year high of 94.563, reached last Tuesday.

Over the past week though, it has trended lower, with a tapering of Federal Reserve stimulus as early as next month already priced in, along with a first interest-rate increase next year.

A recovery in risk sentiment has also weighed on the safe-haven US currency.

Elsewhere, Bank of England Governor Andrew Bailey sent a fresh signal for early UK rate hikes by saying on Sunday that the central bank will "have to act" to counter rising inflation risks. In New Zealand, bets for faster policy normalisation were stoked on Monday by data showing the fastest consumer-price inflation in more than a decade.

The UK and New Zealand led a rise in short-term bond yields globally, with rates in Europe and Australia climbing comparatively more than those in the US, pressuring the dollar.

"The sense that 'transitory' inflation will last longer than previously thought has been the main catalyst" as "the market re-calibrated rate hike expectations in most jurisdictions," Westpac strategists wrote in a research note.

However, the US is likely to be insulated by an energy market bottleneck that is "casting an ongoing cloud over rebound prospects in Europe and China," which "should leave yield spreads at the front end continuing to drift in the USD's favour," they said, adding that pullbacks in the dollar index should be limited to 93.70.

However, Westpac remains bullish on New Zealand's kiwi dollar - which isn't part of the dollar index - targeting a climb to $0.74 by year-end, and recommending buying any dips to $0.6985.

The kiwi rose 0.11 per cent to $0.7093, edging back toward a one-month high of $0.7105 reached on Monday.

The Aussie dollar gained 0.09 per cent to $0.74225, approaching a more than one-month high of $0.7440 touched at the end of last week, even after minutes of the Reserve Bank of Australia's September meeting showed on Tuesday that policymakers are concerned tighter policy could harm the labour market.

Sterling added 0.13 per cent to $1.37455, nearing Friday's one-month peak at $1.3773.

The euro advanced 0.09 per cent to $1.16205, approaching the top of this month's trading range.

Against the safe-haven yen, the dollar was little changed at 114.275, but not far from the almost three-year high of 114.47 touched on Friday.

US manufacturing output was hurt as an ongoing global shortage of semiconductors depressed motor vehicle output, providing further evidence that supply constraints were hampering economic growth.

"Our strong USD forecast published in early July reflected - among other things - US economic outperformance, but the USD's drivers may be changing," Commonwealth Bank of Australia strategist Joseph Capurso wrote in a client note.

"The spike in global inflation and interest rates may support the USD as a safe haven if short-term interest rates price in a global monetary tightening cycle that is so strong it forces equities to correct lower," with evidence of that scenario likely seen in a decline in USD/JPY and AUD/JPY, he said.

Published on October 19, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like