US dollar steadies, yuan hits new 3-year high

London

THE US dollar struggled to hold on to its gains on Thursday as more investors weighed up whether the Federal Reserve is edging closer to talking about tapering its asset purchases, and as traders wait for closely watched US inflation data.

China's yuan scaled a new three-year high as investors become more confident that the Chinese central bank is comfortable with a stronger currency amid the country's economic recovery.

It was the only significant move in another quiet day for FX markets, with most currencies pinned in recent ranges as traders wait for any cues on the direction of US monetary policy.

The euro traded at US$1.2203, up 0.1 per cent on the day, and the yen near a one-week low at 109.17 per US dollar.

Sterling dipped to a week-low of US$1.4092 before recovering slightly.

Fed officials have this week downplayed immediate concerns about inflation prompting a knee-jerk policy response. But they - and notably influential vice-chair Richard Clarida - have made a subtle shift in tone by acknowledging that the time to talk about policy changes might be approaching.

Still, most analysts think the Fed actually talking about reining in its asset purchases is some way off, limiting any rebound in the US dollar.

"While the talk of tapering could keep investors on edge, thus subjecting markets to bouts of volatility, we believe the US central bank will give ample notice before changing policy," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

ING analysts said that any near-term spikes in the US dollar "should be rather short-lived, particularly when the eurozone economic data are set to continue improving".

The New Zealand dollar pushed to as high as US$0.7306, below its Wednesday high hit after hints of a 2022 rate hike by the Reserve Bank of New Zealand. The Australian dollar rose 0.1 per cent to US$0.7748.

China's yuan rose 0.1 per cent to 6.3679 per US dollar in offshore markets, a three-year high, with investors raising their bets on further strength, confident that the People's Bank of China is not displaying discomfort with the rally. The strengthening yuan has helped stabilise other emerging market currencies after a sell-off in recent months.

Market attention now turns to US inflation data due on Friday as investors gauge the extent of a jump in price growth in recent months. REUTERS