US dollar squashed as Fed seen softening inflation stance

[SINGAPORE] The dollar crumbled on Monday as cracks in the US economic recovery drove investors away from the world's reserve currency as they increased bets the Federal Reserve could flag another accommodative shift in its outlook this week.

The greenback fell to a four-month low against the yen, a new 22-month trough on the euro and a five-year low against the Swiss franc, while gold minted a record high.

The Fed meets Tuesday and Wednesday after labour data last week showed the US employment recovery wobbling. No major announcements are anticipated but analysts expect policymakers may begin laying the groundwork for more action in September or the fourth quarter.

The US central bank could firm recent hints about the benefits of an average inflation target, which would allow rates to stay lower for longer.

"I think we're seeing the US dollar adjusting to that," said Chris Weston, head of research at Melbourne brokerage Pepperstone.

"If they are to ever get inflation...then the reaction is to allow the economy to run hot for a large period of time," he said. "So the chance of the Fed raising in the next five years is being repriced in the US dollar -- there's a momentum trade as people run this short position into the Fed meeting."

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The value of short dollar positions hit its highest in two years last week, while the futures market is pricing negative rates in the US next August and no upward movement in the next three years. The euro rose 0.5% to US$1.1725 and the Antipodean currencies gained by the same margin, while sterling and the Singapore dollar both hit four-and-a-half month highs.

The pound was last at US$1.2842, the Aussie sat at US$0.7134 and the kiwi at US$0.6675, a fraction below its highest since January.

PASS THE STIMULUS

Market sentiment is being clouded by concerns over the global recovery as coronavirus cases spike and geopolitical tensions worsen.

None of the majors made much headway on the yen and the yuan, a barometer of Sino-US relations, struggled to capitalise on the dollar's weakness. It stayed on the weaker side of seven-per-dollar at 7.0021 in offshore trade.

China said it had taken over the premises of the US consulate in Chengdu on Monday after ordering the facility shut in retaliation for being ousted from its consulate in Houston.

Elsewhere, investors are also beginning to fret about US political deadlock over the next round of fiscal stimulus with a month-end deadline looming to extend some unemployment benefits.

The White House and Senate Republicans agreed on a US$1 trillion relief package, but that must be negotiated with Democrats who have been pushing for bigger spending.

Last week a recovery in the US job market unexpectedly stalled, while purchasing manager surveys showed Europe's recovery pulling ahead - adding to nerves about any letup in US stimulus.

"Failure to pass additional fiscal measures or a minimalist bill will likely generate a significant shock to markets," said Steve Englander, head of G10 FX research at Standard Chartered in New York.

"We expect a big stimulus package that probably will reflect Democratic priorities on income support and spending." 

REUTERS