US dollar holds firm as market awaits Fed minutes

London

THE US dollar held onto last week's gains on Monday as investors waited for Fed minutes that may give more clues on what prompted US policymakers to strike a broadly neutral stance this month.

The minutes, due on Wednesday, are expected to give insights into the May 1 Fed meeting which decided to keep interest rates steady and signalled little appetite to adjust them any time soon, taking note of strong jobs growth.

Since then, trade tensions between Washington and Beijing have escalated, casting a shadow on the outlook of global growth and fuelling expectations the US central bank will have to cut interest rates in the coming months.

Indeed, market strategists note the implied yields on US futures contracts are starting to price in a second rate cut this year as concerns have mounted.

"As such, these (Fed) minutes will take on added significance as markets try to figure out the Fed's true message," said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.

Increased expectations of rate cuts have so far have had little impact on the US dollar with the currency holding firm against a basket of its rivals after rising 0.7 per cent last week, its biggest weekly rise in two months.

The greenback has found strength from the escalating trade tensions as some investors have turned to it as a safe haven.

Still, positioning data suggested that the strength may be temporary, as investors have trimmed some of their long positions in the US currency against both its developed and emerging market rivals.

The Australian dollar surged and is on track for its biggest rise this year as investors cheered an unexpected election win by Prime Minister Scott Morrison's conservative coalition.

The Aussie was last up 0.7 per cent at US$0.6914, having bounced from a four-month trough of US$0.6865. It was briefly quoted as high as US$0.6990 but dealers said that was a miss-hit and the actual transacted peak was US$0.6938.

"The surprise victory is fuelling the rally as many expected the Labour party to win but an Australian rate cut is still very much on the cards in the coming months and that will weigh on the currency," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

The centre-left Labour party had been tipped to win the federal election, beating Morrison's centre-right Liberal National Coalition, which investors see as more business-friendly. REUTERS