Dollar retreats from 3-week high as attention shifts to Fed

London

THE dollar retreated from three-week highs on Wednesday as traders took some profits before the Federal Reserve's first expected rate rise of 2018 and focused on whether it will indicate three or four increases are likely this year.

The dollar fell 0.2 per cent against a basket of currencies, after hitting a nearly three-week high on Tuesday.

With the US currency weakening, the euro and yen were able to recover some losses made on Tuesday. The dollar has been stuck in a trading range as investors wait to see whether the Fed will forecast four rate increases this year, instead of the median three seen in December's quarterly forecast.

Many analysts doubt the dollar can rally much, since so many investors remain bearish. The dollar sold off in January and February on bets that trade and budget deficits would pull it down. Comments by the Treasury Secretary that a weaker dollar was good for the US also weighed on the currency. The Fed "will have to go some to really move the needle on market thinking or indeed, to take the dollar out of its current range and the FX market out of its mindset," said Kit Juckes, chief FX Strategist at Societe Generale.

The two-year US treasury yield jumped to 2.3449 per cent on Tuesday. As the US currency fell, the euro - which has been driven by dollar-related news in recent weeks - gained 0.3 per cent to US$1.2275, having fallen 0.78 per cent on Tuesday and hitting a near three-week low of US$1.2240.

Adam Cole, chief currencies strategist at RBC Capital Markets, said a "knee-jerk reaction" to the Fed flagging four hikes this year may see the dollar strengthen against the euro. He said he remained moderately bullish on the dollar, because the Fed's raising rates faster than other central banks supported the currency.

Against the yen, the dollar fell 0.2 per cent to 106.345 yen, after Tuesday's gains of 0.4 per cent, though trading was slowed by a public holiday in Tokyo.

Elsewhere, the Canadian dollar and Mexican peso gained after reports that the US government administration had dropped a demand related to vehicle exports, removing a barrier to a deal for a new North American Free Trade Agreement.

The Canadian dollar rose 0.5 per cent to C$1.3003 to the US dollar, its best level since March 15. The peso rose more than one per cent to a one-week high of 18.559 per US dollar.

The Australian dollar fell to a three-month low of US$0.7679 on Tuesday but recovered some ground on Wednesday to trade up marginally at US$0.7686.

Sterling gained 0.5 per cent against the dollar to US$1.4065 after data showed that UK wages grew at their fastest pace for more than two years, supporting bets that the Bank of England would raise interest rates as early as May. REUTERS