US dollar on the back foot, sterling unsettled by politics

[SYDNEY] The US dollar stayed on the defensive early on Monday, having extended its losses for a third week in the wake of dovish signals from the Federal Reserve.

Investors also gave sterling a wide berth after British Prime Minister David Cameron was forced into a hasty cabinet reshuffle on Saturday following the shock resignation of a senior minister.

The pound was marked as far down as US$1.4430, but has since returned to US$1.4463, 0.1 per cent lower on the day.

The US dollar index was little changed at 95.063, not far from a five-month trough of 94.578 set on Friday. It had trimmed some of its losses as investors lightened bearish positions ahead of the weekend.

Whether the market will resume selling remained to be seen with liquidity in Asia likely to be dampened by a holiday in Japan. Japanese markets reopen on Tuesday.

The greenback fetched 111.51 yen, still within reach of Friday's 17-month low of 110.67. The euro, which last week scaled a one-month peak of US$1.1342, stood at US$1.1271.

US dollar bulls were hit hard last week after the Fed held interest rates steady and cut in half the number of projected quarter-point hikes to just two this year.

Fed chair Janet Yellen also sounded doubtful that a recent firming in US inflation would be sustained, suggesting the central bank is in no hurry to tighten policy.

Analysts at ANZ said removing two full hikes from the baseline projections was a significant move for the Fed at a time the US economy still looked in pretty good shape.

"Of course it could be a move that is fully justified if global economic conditions do continue to deteriorate," they wrote in a note to clients.

"But one still has to wonder if the Fed is reverting back into old habits of providing markets with additional stimulus every time they throw a tantrum."

The European Central Bank (ECB) was also looking to soothe market nerves. Its chief economist, Peter Praet, on Friday said rates have not reached their lower limit yet.

He told a newspaper interview the ECB can cut rates again if the euro zone's economy fails to pick up and, under extreme circumstances, the bank might even consider printing money and giving it out directly to people.

Mr Praet's comments came a week after ECB President Mario Draghi upset the market by saying he did not expect further rate cuts were needed after unveiling a fresh set of stimulus.

REUTERS