US dollar loses some steam after Fed boost

London

THE US dollar dipped on Monday against major currencies, but broadly held most of the previous week's gains after the Fed's surprise hawkish tilt.

The dollar index lost momentum after a leap of 1.9 per cent last week - the most since March 2020 - as the US Federal Reserve signalled a sooner-than-expected end to its ultra-easy monetary policy.

The index, which tracks the greenback against six major currencies, fell 0.2 per cent to 92.074 from a high of 92.405 reached on June 18, a level not seen since April 13.

The Fed's hawkish shift has weighed on markets since, although risk sentiment improved somewhat on Monday, reflected in European stock markets turning positive.

Among currencies gaining ground was sterling, up 0.6 per cent at US$1.3877, after shedding more than 2 per cent versus the dollar the previous week.

The euro also gained around a quarter of a percent, at US$1.18960. The yen was last up 0.2 per cent, shedding some earlier gains.

"The Fed's hawkish policy shift has brought an abrupt end to the recent period of low volatility and narrow trading ranges for G10 FX," currency analysts at MUFG said in a note.

"The Fed has encouraged market participants to price in more rate hikes into next year lifting US short rates and the USD."

The Fed's policy stance has become a tailwind for the dollar and will be a challenging backdrop for risk assets, Westpac analysts said.

While the dollar index has the scope to test highs reached in March after its recent gains, "there's not enough juice for a sustained medium-term breakout beyond that", they added.

Analysts at Goldman Sachs agreed the dollar's gains may not be sustained, noting other central banks will need to consider policy normalisation too as their economies recover from the blow of the pandemic.

In cryptocurrencies, Bitcoin's poor recent run continued with an 8 per cent drop below US$33,000, as China expanded restrictions on mining to the province of Sichuan.

Cryptomining is big business in China, accounting for more than half of global Bitcoin production. REUTERS