US dollar holds its gains as Fed set for lengthy inflation fight

THE US dollar touched a 3-week high on Thursday (Aug 18) after minutes from the Federal Reserve’s (Fed) July meeting pointed to US interest rates staying higher for longer to bring down inflation.

The stronger greenback caused the pound briefly to dip below US$1.2 in early European trading, its lowest in 3 weeks, the euro to drop to as low as US$1.0146 and the Japanese yen to drift down to 135.45 per US dollar.

This pushed the US dollar index as high as 106.96, its highest since late July.

In the course of morning trading, however, the euro, sterling and yen all pared their losses, recovering to trade flat on the day, leaving the US dollar index at 106.65.

Thomas Poullaouec, head of multi-asset solutions APAC at T Rowe Price, said he expected the US dollar would “keep on smiling”.

“The ‘US dollar smile’ theory holds that the currency does well at each end of the global growth continuum, benefiting when relative US growth and rates are higher as well as from being a ‘safe haven’ when global growth is declining - both of which are happening,” he said in emailed comments.

“At this point, it appears the only thing that could slow the US dollar is a pivot by the Fed, which would likely only come amid signs of much weaker growth in the US or stronger evidence of receding inflation. For now it looks like the US dollar will keep on smiling.”

Fed officials saw “little evidence” late last month that US inflationary pressures were easing, minutes released on Wednesday showed.

They flagged an eventual slowdown in the pace of hikes, but not a switch to cuts in 2023 that traders until recently had priced in to interest-rate futures.

Traders see about a 40 per cent chance of a third consecutive 75 basis point Fed rate hike in September, and expect rates to hit a peak around 3.7 per cent by March, and to hover around there until later in 2023.

In Asian trade, the greenback gained most against the Antipodeans, especially the Aussie, which was dragged down as weaker-than-expected wage growth weighed on Australia’s rates outlook.

The Australian dollar fell to a 1-week low of US$0.6899, following labour data that showed falls in both employment and the jobless rate, before bouncing back to US$0.6951, up a fraction.

China’s yuan , meanwhile, continued to struggle as weak consumption, low confidence, anaemic credit growth, a property crisis and restrictive Covid-19 policies have cast a long shadow over prospects for the world’s second-largest economy.

The yuan fell nearly 0.2 per cent to 6.788 per US dollar, and also dropped below its 200-day moving average against the euro. REUTERS