US dollar hovers near peaks as Fed heads for taper

London

THE US dollar hovered near recent peaks versus the euro and the yen on Wednesday (Nov 3) as investors waited for the US Federal Reserve to start unwinding its pandemic-era stimulus and to assess Chair Jerome Powell's take on inflationary pressures.

Moves were small in Asia and at the start of the European trading day in the middle of a busy week for central banks, with the Bank of England meeting on Nov 4.

European Central Bank (ECB) President Christine Lagarde said an interest rate rise in 2022 was very unlikely because inflation was too low, sending government bond yields lower. But the euro barely budged.

Against the euro, the greenback was down marginally at US$1.1592, not far from the US$1.1522 low reached in October and the strongest level for the dollar since July 2020. The dollar index dipped 0.1 per cent to 93.996 but remained close to its 2021 peak of 94.563 hit last month. Dollar/yen traded at 113.8, near a 4-year high.

The Fed is expected to announce the tapering of its US$120 billion-a-month asset purchase programme in its policy statement at 1800 GMT.

Traders are focused on clues around what that means for rate rises, after a month of seismic bond market moves in anticipation of hikes as soon as next year.

Analysts are divided as to what the Fed meeting and statement will mean for the dollar, especially after the Reserve Bank of Australia (RBA) on Nov 2 and ECB on Wednesday (Nov 3) both pushed back against market pricing of tighter policy.

The RBA on Nov 2 abandoned its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because the bank also pushed back on aggressive pricing for 2022 hikes.

The Aussie dropped 1.2 per cent against the dollar on Nov 2 and sat at US$0.744 on Wednesday (Nov 3), up 0.2 per cent from the session open. The New Zealand dollar was also dragged 1 per cent lower, but found support from strong labour data and hovered at US$0.714, up 0.4 per cent.

Money markets have dialled back expectations for a 15 basis point hike from the Bank of England on Nov 4, but still expect one before 2022.

Sterling recovered from a 2-week low to trade 0.2 per cent higher US$1.3645. The euro fell again versus the Swiss franc and was last down 0.3 per cent at 1.055 francs, close to this week's almost 18-month low of 1.0548. REUTERS