US dollar firms in big week for FX markets

London

THE US dollar held firm on Monday after posting its biggest weekly rise in six weeks as traders cut their bearish bets before a much-anticipated US Federal Reserve meeting that might signal a change in the outlook for US monetary policy.

Currency markets settled in tight ranges with implied volatility tumbling to multi-year lows after last week's strong inflation readings and a dovish European Central Bank meeting failed to dislodge currencies from recent trading levels.

The Fed begins a scheduled two-day policy meeting on Tuesday. Nearly 60 per cent of economists in a Reuters poll said a much-anticipated taper announcement will come in the next quarter, despite a patchy recovery in the job market.

Recent data pointing to a surge in inflation has raised concerns that price pressures following the post-Covid economic reopening could force policymakers into an earlier tapering of currency-depreciating stimulus.

While consensus expectations are the Fed will remain on hold until 2023, some believe the failure of the US dollar to weaken in recent days despite inflation-adjusted US bond yields softening further signals a broader caution among investors.

Indeed, the US dollar has gained in recent weeks even as yields on benchmark 10-year US Treasury notes fell to more than three-month lows of 1.42 per cent on June 11.

"Market participants are wary of a hawkish surprise that could at least temporarily lift the US dollar," MUFG strategists said in a daily note.

Against a basket of its rivals, the greenback edged higher to 90.5 after rising as much as 0.4 per cent last week, its biggest weekly rise since early May.

The greenback's gains were aided by some unwinding of short US dollar bets. In the week ended June 8, speculators had ratcheted up net short positions to the highest in nearly three months at US$18.35 billion.

Caution ahead of the Fed meeting also pushed a Deutsche Bank gauge of implied currency-market volatility to the lowest since February of last year, dropping around 10 per cent since the start of the month.

The pound was the biggest loser among developed currencies on news that Britain was set to delay the end of social distancing measures, as the government tries to slow a rapid rise in Covid-19 infections.

Against the US dollar and the euro, the pound weakened as much as 0.2 per cent in early London trading. REUTERS