Dollar slips from 16-month highs as Fed hawkishness dominates

London

THE dollar slipped on Thursday (Nov 25) but was still close to its highest since July 2020 against the euro, having strengthened due to market expectations that the US Federal Reserve will raise rates sooner than other major central banks.

Minutes from the Fed's Nov 2-3 meeting boosted the dollar on Wednesday as they indicated that the Fed had become more concerned about rising inflation. Various policymakers said they would be open to speeding up the taper of their bond-buying programme if high inflation held and move more quickly to raise interest rates.

Data on Wednesday showed US jobless claims were at a 52-year low, consumer spending increased more than expected in October and inflation was rising.

But on Thursday the dollar's upward trend - which has seen it gain around 2.7 per cent this month - paused slightly, with the dollar index down 0.1 per cent at 96.707 at 1242 GMT, compared to the 16-month high of 96.938 it reached late on Wednesday.

Versus the Japanese yen, the dollar was just below a 5-year peak.

Neil Jones, head of FX sales at Mizuho, said that "post-Thanksgiving next week and into December I'm looking for further dollar strength, albeit at a fairly subdued pace".

Jones said that, towards the end of the year, seasonal demand for dollars would also contribute to its strength.

But, in a note to clients, ANZ strategists John Bromhead and Daniel Been said that, with US markets closed for Thanksgiving, "a period of tactical consolidation might be close".

The euro was up 0.2 per cent versus the dollar at US$1.1224, a slight recovery. But it has still lost around 2.9 per cent so far this month, weighed down by expectations that the European Central Bank being more dovish than the Fed, as well as, more recently, a new wave of Covid-19 restrictions in Europe.

A surge in coronavirus infections in Germany and unusually high inflation rates are weighing on the consumer morale in Europe's largest economy, a survey showed on Thursday.

Sweden's central bank left monetary policy unchanged, arguing that inflation would ease next year. It pencilled in its first post-pandemic rate hike for the end of 2024.

The Swedish kronor strengthened slightly, and was up around 0.4 per cent at 9.0739 versus the dollar and up around 0.3 per cent at 10.185 versus the euro. But it was still set for its worst month versus the euro since March 2020.

The Australian dollar - seen as a liquid proxy for risk appetite - was down 0.2 per cent at US$0.7185. The New Zealand dollar was down 0.4 per cent at US$0.6846, extending its losses from the previous session, when the country's Reserve Bank raised the key rate by a quarter of a percentage point, disappointing bulls hoping for a half point increase. REUTERS