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Fed Rhetoric Holds Dollar Back As Inflation Focuses

12 May 2021

Fed Rhetoric Holds Dollar Back As Inflation Focuses

On Wednesday, the U.S. dollar held near a 2-1.5-month low against its main counterparts, as traders held bets that the Federal Reserve would remain steadfast in its soft policy ahead of the data, which is expected to show a sharp rise in annual inflation in the US.


Analysts forecast that at 12:30 GMT prices will increase by 3.6% year-on-year, helped by the low base of April last year.


Monthly growth is forecast to be modest growth of 0.2%.


Higher numbers could increase pressure on the Fed to raise rates, leading to a sell-off in rate-sensitive technology stocks this week.


But currency markets were reassured by repeated promises of patience from Fed speakers, and the dollar was pressured by rising commodity currencies.


Overnight, the dollar hit its lowest level in more than two months against the euro, after the European economy's growth report was published, and was trading just below that level at $1.2126 in Asia.


The yen fell 0.2 percent to $108.835.


Risk aversion helped the dollar-seeker indicator rise slightly to 90.278 as sales pressures in the stock markets continued, but this still left the dollar index just above the key support in the region of 89.677 and 89,206.


Commodity currencies cooled near iconic peaks, with the Australian dollar and kiwi falling 0.5 per cent to just below recent ten-week highs, while the Canadian dollar was little changed, only slightly falling to Tuesday's near four-year high.


Sterling clung to a recent gain to trade at $1.4118.


"Until the stock market has experienced a more dramatic correction, the dollar is unlikely to receive a safe haven offer," said Rodrigo Catril, senior currency strategist at National Australia Bank in Sydney.


"Now we know that the Fed is firmly committed to easing policy," he said, a view that was bolstered by recent comments by Fed members that made Dallas Fed President Robert Kaplan's mention of a decline in support last month a similar exception.


"Everyone else has firmly stated that this is not the time yet... and that's a negative story for the dollar."


St. Louis Fed President James Bullard said Tuesday that he expects inflation to stay at 2.5 percent next year, while Fed Chief Lael Brainard said weak labor data last week showed the economic recovery should be long.


"Keeping patience during the temporary surge associated with the resumption of work will help ensure that the underlying economic momentum that will be needed to meet our targets, as some current tailwinds turn into headwinds, will not be prematurely reduced by tightening financial conditions," she said.


The nominal yield in the US has crept up with a focus on inflation, but real yields remain negative and under pressure.


The U.S. currency is also under pressure from improving global economic growth prospects, which tend to attract investors' cash to emerging markets, as well as a large and growing trade deficit and A U.S. current account that also sends dollars abroad.


The dollar index "finds some stability associated with risk aversion, just above 90" amid a sell-off in shares, "but it is unlikely to translate into any meaningful growth," Westpac strategists write.


"The Federal Reserve continues to emphasize patient promise" while "eurozone rebound indicators continue to close the gap with the US," keeping the dollar index heavy over the next few months, they said.


In the digital space, cryptocurrency airwaves rose about 4% to a record $4,358.38, bringing its profit this month to 56%.


This comes amid a larger rival bitcoin remaining below $60,000, almost a month after reaching a record peak of $64,895.22. It last traded at about $57,471.20.

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