US dollar slips after Powell strikes balanced tone on inflation

THE US dollar fell on Wednesday (Feb 8) after Federal Reserve (Fed) chair Jerome Powell declined to meaningfully harden his tone on inflation, despite very strong US jobs numbers last week.

In a question-and-answer session before the Economic Club of Washington on Tuesday, Powell said interest rates might need to move higher than expected if the US economy remained strong, but reiterated that he felt a process of “disinflation” was underway.

The US dollar slipped as Powell spoke, and lost more ground in early European trading on Wednesday.

The euro was last up 0.14 per cent to US$1.074, after falling to US$1.067 in the previous session, its lowest since Jan 9. It remained far above September’s 20-year low of US$0.953.

“One would expect that Powell would have delivered a little bit of a more constructive view on the rate outlook,” said Kamal Sharma, senior FX strategist at the Bank of America.

“In fact, Powell essentially fell back on the FOMC statement,” he said, referring to the Fed’s interest rate press conference last week, the Federal Open Market Committee.

“So that has taken the steam out of the US dollar recovery that we’d see (after) the payrolls report.”

Investors were also digesting hawkish comments from two German officials at the European Central Bank (ECB).

“From where I stand today, we need further, significant rate hikes,” German central bank chief Joachim Nagel told the newspaper Boersen-Zeitung on Tuesday.

His colleague Isabel Schnabel said it is not yet clear that the ECB rate hikes so far would bring inflation back to 2 per cent.

Against a basket of currencies, the US dollar index fell 0.18 per cent to 103.12 on Wednesday, after slipping 0.3 per cent in the previous session.

Sterling rose 0.37 per cent to US$1.209, recovering from Tuesday’s one-month trough of US$1.196.

The greenback had a short-lived rally following Friday’s blockbuster jobs report, which showed that non-farm payrolls had surged by 517,000 jobs last month.

That sent the US dollar index to a one-month high of 103.96 on Tuesday, as investors raised their expectations of how much further the Fed would need to keep raising interest rates.

Futures pricing on Wednesday showed that markets were expecting the Fed funds rate to peak just above 5.1 per cent by June, from a current range of 4.5 per cent to 4.75 per cent.

“The markets and the central bank are all in a position now where they’re just watching the data, so for now, we’re less sensitive to Fed officials and far more sensitive to data,” said Chris Weston, head of research at foreign-exchange broker Pepperstone.

Meanwhile, pricing in derivatives markets showed that traders expect the ECB to hike rates to around 3.5 per cent in late summer, from 2.5 per cent now.

Elsewhere, the yen rose 0.29 per cent, with one US dollar buying 130.69 yen, after surging 1.2 per cent in the previous session.

Japanese real wages rose for the first time in nine months, thanks to robust temporary bonuses, data on Tuesday showed.

The New Zealand dollar climbed 0.19 per cent to US$0.634, while the Australian currency advanced 0.24 per cent to US$0.698, after surging more than 1 per cent on Tuesday.

The Reserve Bank of Australia on Tuesday raised its cash rate by 25 basis points. REUTERS