Greenback holds gains after hawkish Fed comments

London

THE US dollar held gains against a basket of currencies on Thursday after hawkish comments from the US Federal Reserve led markets to move forward the likely timing of a policy tightening.

Sterling ticked slightly higher after the Bank of England (BOE) kept the size of its bond buying programme unchanged and held its benchmark interest rate at a historic low of 0.1 per cent.

BOE said notably that it would start reducing its stock of bonds when its policy rate reaches 0.5 per cent by not reinvesting proceeds and that it would consider actively selling down holdings when the rate reaches at least 1 per cent.

The euro ticked higher 0.15 per cent to US$1.1854, having recoiled from a top of US$1.1899 overnight. The dollar also reached 109.75 yen, although the yen began to recover some lost ground.

On Aug 4, Fed vice-chair Richard Clarida said conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023.

He and three other Fed members also signalled a move to taper bond buying later this year or early next depending on the labour market over the next few months.

Predicting the jobs report with any confidence remains tricky as the spread of the Delta variant and labour bottlenecks roil the market.

Thus, the median forecast for payrolls is 870,000 while the range of estimates stretches from 350,000 to 1.6 million.

Mixed data on Aug 4 added to the uncertainty as a surprisingly weak ADP report on private hiring clashed with the strongest reading yet for US services.

Dr Clarida's comments led investors to price in slightly higher chances of a hike in late 2022/early 2023 and to a flattening of the Treasury yield curve as short-term yields rose.

Such a move would likely precede any tightening by the European Central Bank, which is battling to get inflation near its target.

The Reserve Bank of New Zealand seems likely to hike rates at its next policy meeting on Aug 18, making it the first in the developed world to move since the pandemic hit.

A super-strong jobs report on Aug 4 added to the case for New Zealand's tightening and sent the kiwi to a one-month peak of US$0.7088 overnight, before steadying at US$0.7041. REUTERS