Dollar pares losses with bond taper signals

New York

THE dollar pared losses on Friday after Federal Reserve chairman Jerome Powell said the US central bank should begin reducing its asset purchases soon, but should not yet raise interest rates.

Powell said employment is still too low and high inflation will likely abate next year as pressures from the Covid-19 pandemic fade, even as many market participants are concerned that rising price pressures will last longer than policymakers believe.

Investors have taken profits since the dollar index hit a one-year high the previous week, when concerns that inflation will remain stubbornly high for longer led investors to bring forward expectations on when the Fed will first raise rates to mid-2022.

Now, "there's a bit of a positioning unwind taking place, we've obviously seen a firmer dollar since the September Fed", said Mazen Issa, senior foreign exchange strategist at TD Securities in New York. "That also dovetails with the seasonal tendency for the dollar to soften into the end of the month." The Fed said at its September meeting that it will likely begin reducing its monthly bond purchases as soon as November, and signalled that interest rate increases may follow more quickly than expected.

The dollar index fell 0.10 per cent to 93.64, and is down from a one-year high of 94.56 the previous week. The euro gained 0.09 per cent to US$1.1636.

Data on Friday showed that US business activity increased solidly in October, suggesting that economic growth picked up at the start of the fourth quarter as Covid-19 infections subsided, though labour and raw material shortages held back manufacturing.

The dollar rally has also faded as investors build in expectations for sooner rate increases in other currencies.

Issa expects the dollar to regain traction, however, as global central banks push back against the aggressive repricing of rate hikes, while the Fed is likely to remain relatively hawkish and move forward with a reduction in its bond purchase programme.

"Once we get the pushback from other central banks and the Fed's committed to taper, we should see dollar dips really being shallow," Issa said.

The Australian dollar, which is a proxy for risk appetite, gave up earlier gains and was last down 0.05 per cent at US$0.7462.

The safe-haven yen gained, though it remains the weakest performer, having dropped by almost 10 per cent this year. The dollar was last down 0.50 per cent against the Japanese currency at 113.42 yen. REUTERS