US dollar trades just off 9-week lows on dovish Fed

London

THE US dollar traded just off nine-week lows on Thursday as a doggedly dovish outlook from the US Federal Reserve and bold spending plans from the White House gave a green light for the global reflation trade.

President Joe Biden's push for another US$1.8 trillion in spending also risked expanding the US budget and trade deficits, a perennial Achilles heel for the dollar.

The euro made the most of the opportunity to hit its highest since late February at US$1.2150, before steadying at US$1.2126.

Fed chairman Jerome Powell did the dollar no favours by quashing speculation about an early tapering of asset buying, saying employment was still far short of target.

"With front-end US real rates already deeply negative and set to fall further as US CPI rises sharply this quarter, this is likely to be a dollar negative, particularly when other parts of the world (namely Europe) are set to see an economic rebound in coming months," said Petr Krpata, chief EMEA FX and IR strategist at ING.

Even the outperformance of the US economy had a sting in the tail for the dollar as it sucked in imports and drove the trade deficit to record highs in March.

It could also temper any reaction to an upbeat US gross domestic product (GDP) report for the first quarter due later on Thursday, where market forecasts are for annualised growth of a whopping 6.1 per cent.

The closely-watched Atlanta Fed's "GDP Now" estimate is that GDP expanded by 7.9 per cent, suggesting considerable upside risk.

Against a basket of currencies, the dollar clambered off a nine-week low at 90.606, and a long way from the rally peak of 93.439 hit at the end of March.

The Fed's dovishness was in marked contrast to the Bank of Canada which has already begun to taper its asset buying, sending the dollar sliding to a three-year trough against the loonie at C$1.2283.

Another notable break lower came against the Norwegian crown, where the dollar hit its lowest since October 2018 at 8.1460 crowns.

The crown has been buoyed by rising oil prices as the global economic recovery boosts demand for commodities, a trend that is also benefiting the Australian and New Zealand dollars.

The dollar also shed much of the week's gain against the yen, falling back to 108.86 from Wednesday's top of 109.07. REUTERS