US dollar backs down as traders price in a Fed skip
THE US dollar hovered around multi-week lows against the euro and sterling on Wednesday (Jun 14), after unexpectedly soft US inflation data cemented the view that the Federal Reserve will not raise interest rates later in the day.
China’s yuan sagged to its weakest in over six months after the central bank cut rates, and as speculation mounts that more stimulus is on the way to support the sputtering post-Covid economic recovery.
The US dollar index – which measures the performance of the US currency against six others – dipped 0.2 per cent to 103.14, after touching its lowest since May 22 overnight at 103.04.
In April, the US consumer price index (CPI) logged its smallest year-on-year increase since March 2021 at 4 per cent.
The chances of the Fed raising rates by a quarter point have dropped to below 5 per cent, from around 21 per cent a day earlier, according to the CME Group’s FedWatch Tool.
“Going into the meeting, the market is expecting a hawkish hold – unless they surprise us all and hike. It’s quite a high hurdle for (the Fed) to deliver a hawkish surprise tonight through rhetoric alone,” MUFG strategist Lee Hardman said.
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“For us, we think we still can’t completely rule out that the US dollar could at least try to rally initially on the back of hawkish comments from the Fed or from updates or projections,” he said.
The US dollar index is heading for its largest two-week drop in two months, having lost 0.8 per cent in value in that time, as the view has taken hold among investors that, while the Fed may be close to the end of its current course of rate hikes, other central banks have further to go.
The Reserve Bank of Australia and the Bank of Canada last week delivered surprise rate rises, while the chances for the Bank of England to deliver a half-point rise when it meets next week have reached 20 per cent after shock wage-growth data on Tuesday.
Unsurprisingly, the US dollar has lost the most so far this month against the Australian dollar, which has gained 4.3 per cent, followed by the Canadian dollar, which has risen by 2 per cent.
The euro has been steadily clawing back from 2-1/2 month lows in late May and was last up 0.1 per cent at US$1.0805. The European Central Bank (ECB) delivers its decision on rates on Thursday, with a quarter-point hike to 3.50 per cent widely expected. Its policymakers have been clear that inflation across the eurozone is too high and the central bank has more work to do.
“In terms of short-term impact, we expect the combination of a hawkish hold by the Fed and a hawkish 25-bp hike by the ECB to leave the euro trading closer to US$1.0700 than US$1.0800,” ING strategist Francesco Pesole said.
“The ECB may struggle more to convey a hawkish message after inflation and growth data came in on the softer side.”
Sterling rose 0.3 per cent to trade at a one-month high of US$1.265, on track for a 1.1 per cent gain over the last two days.
The US dollar eased 0.14 per cent to 139.98 yen, retreating from a one-week high the day before. The Bank of Japan is expected to retain its ultra-easy policy settings on Friday.
Meanwhile, the Chinese yuan hit 7.1785 earlier, its weakest against the US dollar since late November. It was last at 7.167, showing a 0.1 per cent rise versus the US dollar.
The People’s Bank of China’s cut a key short-term lending rate for the first time in 10 months on Tuesday and is widely expected to cut the borrowing cost on medium-term policy loans on Thursday, a Reuters poll showed. REUTERS
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