Dollar inches down, sterling steady ahead of BOE meeting

London

THE dollar slipped on Thursday, having spent the week gradually edging away from two-month highs hit after the US Federal Reserve's surprise hawkish shift at its meeting last week.

Currency markets were quiet as traders weighed up different signals from Fed officials on the timing of a withdrawal of monetary stimulus.

The dollar index was down 0.1 per cent at 1023 GMT, having pared back some gains after hitting a two-month high of 92.408 on Friday. The euro was a touch higher against the dollar, up 0.2 per cent on the day at US$1.19465.

German business morale rose by more than expected in June and hit its highest level since November 2018, an Ifo survey showed.

The dollar got some support overnight from two Fed officials saying that a period of higher inflation in the US could last longer than expected. But on Tuesday, Fed chair Jerome Powell had said that price pressures should ease on their own.

Six Fed officials are due to speak on Thursday, including New York Fed president John Williams, who on Tuesday said any conversation about when to adjust interest rates is still far off.

"It appears that the market pricing of (the) Fed's rate expectations are already sitting on the hawkish side so that additional comments indicating early tapering/hikes now have a more contained and above all short-lived impact on sensitive assets," wrote ING FX strategists in a note to clients.

"We continue to expect the market to reward those currencies that are backed by tightening cycles (Norwegian kroner, Canadian dollar and New Zealand dollar are notable examples in the G-10 space), although the room for a rally in low yielders has probably shrunk."

Market attention is focused on the Bank of England (BOE) meeting and policy announcement.

No policy changes are expected but investors will be looking for any hints that the BOE will follow in the Fed's footsteps as inflation pressures mount.

Sterling was steady at US$1.3968 and 85.505 pence per euro.

"I am not sure whether the BOE will send the signal that the sterling bulls are hoping for," wrote Commerzbank strategist Thu Lan Nguyen in a note to clients.

"I fear that it might be too early and that the recent rise in inflation wasn't high enough yet. As a result, I see considerable potential for disappointment for sterling."

The Australian dollar, which is seen as a liquid proxy for currency market risk appetite, was flat on the day at US$0.7578, having gained 1.4 per cent so far this week.

The US dollar was down 0.1 per cent against the yen, after the pair hit a 15-month high of 111.11 overnight. REUTERS