Dollar slips after Powell embraces tapering, holds on rate hikes

[NEW YORK] The dollar slid on Friday after Federal Reserve Chair Jerome Powell indicated in a highly anticipated speech that the US central bank could start tapering its massive support to the economy could start by year's end, which was not as fast as many in the market had assumed.

Mr Powell said there had been clear progress toward maximum employment and he believed that if the US economy improved as anticipated, "it could be appropriate to start reducing the pace of asset purchases this year."

But Mr Powell told the Fed's annual Jackson Hole symposium the timing and pace of tapering should not be construed as a signal for when interest rates will begin to rise. The speech showed Mr Powell has not adopted the hawkish stance of some Fed officials, said Gregory Anderson, global head of FX strategy at BMO Capital Markets.

"It's pretty clear that if you were worried about the timeline, that we announce in September that we're going to taper starting Oct 1, that's not there in this speech," Mr Anderson said.

"It's not as bad as feared based on the most extreme of the hawks," he added.

The dollar index, which measures the greenback's performance against a basket of six major currencies, fell 0.4 per cent to 92.6760.

The euro rose 0.4 per cent to US$1.1794, while the yen fell 0.2 per cent at US$109.8200.

After minutes of the Fed's policy-setting meeting in July were released last week, the dollar advanced because most market participants anticipated tapering to begin this year.

Mr Powell was clear to detach tapering from "the rate liftoff," or raising interest rates, said David Petrosinelli, senior trader at Insperex in New York.

"He was very clear to delineate that."

The dollar fell as market participants sharply lowered expectations for the Fed's long-term tightening trajectory, said Karl Schamotta, director Of global product and market strategy at Cambridge Global Payments in Toronto.

The dollar began to retreat about 15 minutes before Mr Powell spoke, after James Bullard, president of the St Louis Fed, reiterated his hawkish view that tapering should begin soon and end by next year's first quarter.

Benchmark 10-year Treasury yields fell 3.4 basis points to trade at 1.3 per cent. On Thursday yields jumped to 1.4 per cent, the highest since Aug 12.

The New Zealand dollar dipped slightly after Prime Minister Jacinda Ardern announced that a lockdown against Covid-19 in Auckland is likely to remain in place for another two weeks.

The Swedish crown was flat at 8.7070 after mixed economic data.

The Canadian dollar rose 0.56 per cent to 1.2612 versus the US dollar.

Brent futures, the international benchmark for crude, rose US$1.63 to settle at US$72.70 a barrel and gained 11.5 per cent for the week.

Marc Chandler, managing director at BK Asset Management, said the Canadian currency generally takes its cues from oil, risk with the S&P 500 as a proxy and interest rate differentials.

"The Canadian dollar's strength today is a reflection not so much of Canada, but what's happening in the US and the market takeaway from Mr Powell's speech," Mr Chandler said.

REUTERS