US dollar edges back towards one-month low

THE US dollar edged back towards a 1-month low on Thursday (May 26), as minutes from the Federal Reserve’s May meeting contained few surprises, with most participants favouring additional 50 basis point rate hikes at the June and July meetings.

The US dollar index, which measures the currency against 6 major peers, was down 0.2 per cent at 101.83 as the minutes showed the Fed is likely to stay the course for now, but keep its options open for a range of policy choices after July.

The index has mostly been consolidating around 102 after a short-lived bounce immediately following Wednesday’s release of the minutes.

Analysts noted that expedited tightening would allow some wiggle room if the Fed wanted to slow the tightening cycle in the second half of the year.

“That base case makes sense from where we’re at now, a couple of 50 basis point rate hikes, and then see where we’re at,” said Giles Coghlan, director at GCFX.

The US dollar index reached a nearly 2-decade peak above 105 mid-month, but signs that aggressive Fed action may already be slowing economic growth have prompted traders to scale back tightening bets, with Treasury yields also dropping from multi-year highs.

The implied yield on the eurodollar futures June 2023 contract — essentially where markets see interest rates to be at that point — is down some 80 basis points this month.

ING believes there is room for this to reverse, with the Fed believing the economy is strong enough to withstand rapid tightening.

“Fed speak and the US data calendar suggests those higher levels for the Fed terminal rate could easily be put back into the market — which is dollar supportive,” ING analysts said a note.

SEE ALSO

Dollar off 1-month low, kiwi cedes post-rate hike gain

The 10-year US Treasury yield was last down 1.4 basis points at 2.7308 per cent, after earlier dropping to its lowest level since April 14.

China’s yuan weakened past a key threshold to a near 1-week low against the US dollar as investors were disappointed that a rare high-profile meeting featuring Premier Li Keqiang to support the economy failed to yield any fresh policy measures.

The offshore yuan dropped more than half a per cent to 6.75 yuan per US dollar.

The euro rose 0.35 per cent to US$1.0716, while the greenback fell 0.4 per cent to 126.76 yen.

Risk-sensitive currencies, such as the Aussie, kiwi and loonie were all trading broadly flat against the US dollar.

Sterling rose to a 3-week high of US$1.26165 ahead of an expected announcement from British Chancellor Rishi Sunak on a package of measures to help consumers cope with rising energy bills.

Meanwhile, bitcoin was last trading 1.1 per cent lower at US$29,166. Smaller rival ether was lower by over 5 per cent. REUTERS