Dollar recoups some losses as focus shifts to Fed remarks at Jackson Hole

[LONDON] The US dollar showed signs of recovering some of last week’s losses on Thursday (Aug 27), as investors awaited signals on the US Federal Reserve’s policy path at the Jackson Hole symposium.

This followed data that showed inflation remained stickier than economists had anticipated.

Data in the previous session showed that inflation rose more than expected in July, aiding expectations that interest rates could stay restrictive until the end of this year. Another report reiterated that the economy grew 1.5 per cent in the second quarter.

The euro slipped 0.1 per cent versus the dollar to US$1.1639, while the sterling dipped 0.1 per cent to US$1.3577, as investors pared bets for an interest rate hike by the Bank of England this year.

The yen dipped nearly 0.1 per cent to 159.45 per dollar as traders also digested a speech by the Bank of Japan’s (BOJ) deputy governor.

The US currency was near a one-week high versus its three counterparts.

The dollar index, which measures the greenback’s move against a basket of six currencies, was at 99.158, up about 0.3 per cent this week, following last week’s 0.8 per cent drop.

“The big support for the dollar here is that the US economy continues to outpace that of other major economies,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman.

He added that he expects US rates to stay unchanged for the rest of the year, contrary to market pricing.

SEE ALSO

Greenback nudges higher ahead of US inflation data; Aussie gains on rate bets

Traders are pricing in no change to borrowing costs in September, but place a 74 per cent chance that the Fed will hike interest rates by at least 25 basis points by December, as Middle East tensions keep oil prices elevated.

However, analysts said that no rate hikes this year from the central bank could limit the dollar’s gains.

“I don’t expect the dollar to make new highs, because... the risk of a more dovish Fed repricing and the lack of US fiscal credibility are two big headwinds,” Haddad said.

Currency and bond markets were still recovering from the US Treasury’s attempt last week to limit a rise in long-term borrowing costs through increased long-term bond buybacks.

It revived dollar debasement chatter on soaring debt concerns and government intervention in markets, as reflected in Bitcoin’s 25 per cent gain in August to US$79,423.56.

The spotlight will now be on the Jackson Hole symposium starting later in the day, where chairman Kevin Warsh’s remarks on Friday will be closely monitored for any hints on both the Treasury’s latest shift and monetary policy.

Ahead of the symposium, Kansas City Fed president Jeffrey Schmid said the current setting of central bank rates is not providing restraint to the economy, suggesting that he still favours raising rates to get inflation back to 2 per cent.

Traders were also monitoring central bank policy elsewhere.

On Thursday, BOJ deputy governor Ryozo Himino said timely rate hikes would help avoid an inflation spike that could force abrupt tightening later, but stopped short of signalling an imminent rate hike.

“He did express concern about upside risks to prices... that has likely led markets to conclude that the remarks were not especially dovish,” said Sho Suzuki, a market analyst at Matsui Securities.

“However, the absence of a clear signal means there is some chance the yen could come under renewed downward pressure.”

The yen has cut some gains since the US-Japanese intervention in currency markets in July.

The Canadian dollar held steady at C$1.3873 per dollar and is set for its biggest weekly drop since mid-June. US President Donald Trump said on Wednesday that it was “time to teach Canada you can’t do this anymore”, just days after trade talks between the countries broke down. REUTERS