Dollar rebounds ahead of Fed chief's testimony

London

THE US dollar rebounded off six-week lows on Tuesday as investors' focus shifted to how US Federal Reserve chief Jerome Powell might respond to resurgent inflation expectations, while commodity-linked currencies hovered near multi-year highs.

The recent rise in inflation expectations as investors bet on a post-pandemic economic recovery and the so-called "reflation" trade has lifted US government bond yields. That had fed through to a higher dollar until earlier this month when the greenback resumed its decline.

Analysts expect Mr Powell, who testifies before Congress at 1500 GMT, to provide some reassurance that the Fed will tolerate higher inflation without rushing to raise rates.

That might calm bond markets and eventually weigh on the dollar, they said.

"Mr Powell will very likely reiterate that the Fed is a long way from meeting its goals and that it will likely take some time before 'sufficient progress' has been made to taper its bond purchase programme," UniCredit analysts said.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The dollar index was last at 90.143, up 0.1 per cent on the day, having earlier fallen to 89.941, its weakest since Jan 13.

Positioning data shows investors overwhelmingly betting that a US dollar, which has been dropping since last March, will keep falling as the world recovers from the Covid-19 pandemic.

"Only when the spike in US yields becomes more disorderly and spills forcefully into risk assets, would US dollar experience an across-the-board strength," said ING analysts in a research note.

The euro weakened 0.1 per cent to US$1.2151. Euro zone government bond yields have also been rising but the rally took a brief pause after European Central Bank President Christine Lagarde said on Feb 22 that the bank was "closely monitoring" rising borrowing costs.

Commodity-linked currencies have been among the best performers in 2021. Surging prices for materials from oil and copper to lumber and milk powder have pushed currencies such as the Canadian, Australian and New Zealand dollars to their highest in roughly three years.

On Tuesday, the Aussie traded down 0.2 per cent at US$0.7903 having earlier hit a high of US$0.7934. The New Zealand dollar was down marginally while the Canadian dollar was just below its Monday high. REUTERS