Dollar steadies, risk appetite boosts Aussie, New Zealand dollars

London

THE dollar held steady on Wednesday, after an improvement in global risk appetite saw riskier currencies gain and the safe-haven yen hit a four-year low against the dollar overnight. European stock indices were mostly up and the US 10-year Treasury yield rose to a five-month high overnight, helped by rising optimism about the global economy and corporate earnings. Reduced demand for safe-haven assets saw the dollar hit a four-year high of 114.695 versus the yen overnight. But by 1044 GMT the dollar was up just 0.1 per cent against the yen, at 114.470 .

In a quiet day for currency markets, the dollar index was steady at 93.819, having fallen since it hit a one-year high of 94.563 last week on expectations that the US Federal Reserve would tighten policy more quickly than previously expected. Traders had priced in a tapering of Fed stimulus as soon as next month, followed by rate hikes next year.

Since then, expectations for Fed tightening have pulled back somewhat. Two-year Treasury yields retreated sharply overnight, signalling a scaling back of bets for Fed rate hikes. ING FX strategists said in a client note that the dollar's recent decline could be due to a combination of markets closing long-dollar positions and "a benign risk environment, where a strong US earnings season has continued to offset inflation/monetary tightening concerns".

"At this stage, it looks like the dollar is lacking some catalysts to contain the ongoing correction, and any support to the greenback may need to come from a cool-off in the recent risk-on mood in markets," ING said.

The euro was flat on the day at US$1.16295, showing no immediate reaction to news that Bundesbank president Jens Weidmann, a relentless critic of the European Central Bank's ultra-easy monetary policy, will quit his post.

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The Australian dollar, seen as a liquid proxy for risk appetite, was up 0.2 per cent on the day at US$0.74885, having hit its highest since July overnight. The New Zealand dollar was also up 0.2 per cent at US$0.71665, having reached its highest since June overnight and gaining 1.3 per cent so far this week.

The Canadian dollar was up around 0.1 per cent at US$1.23505, ahead of Canadian inflation data due later in the session. "As inflation persists above their target range and the virus gets under control, the central bank is likely to start thinking about tightening policy," Marshall Gittler, head of investment research at BDSwiss, said in a note to clients. "A rise in the headline inflation rate today could be justification for such a move. In that respect it's likely to prove positive for the Canadian dollar." The pound was down 0.2 per cent at US$1.37605, after data showed that British inflation slowed unexpectedly last month. The figures did little to change expectations that the Bank of England will become the world's first major central bank to raise rates. REUTERS