Corrected-Forex-Dollar In Doldrums As Traders Ponder Fed Policy Path; Sterling Soars

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The dollar languished near
multi-month lows versus major peers on Tuesday, as traders
pondered the prospects for early policy normalisation by the
Federal Reserve ahead of a key jobs report at the end of the
week.
The British pound rallied to a three-year peak at
$1.425, while Canada’s loonie hovered near a six-year
top, amid market expectations for policy tightening in those
countries.
Australia’s dollar rose for a second day to as high
as $0.77605, ahead of a central bank announcement at 0430 GMT,
although economists predict no change to monetary policy.
The offshore Chinese yuan edged back toward
Monday’s three-year high of 6.3526 per dollar, last trading at
6.3640, paring a retreat spurred by the monetary authority’s
tightening of banks’ FX requirements to stem the currency’s
rise.
The dollar index, which tracks the greenback against
six peers, was back below 90 from as high as 90.447 on Friday,
when a measure of U.S. inflation closely watched by the Fed
posted its biggest annual rise since 1992. The gauge sank 0.3%
on Monday, in a market thinned by U.S. and British holidays.
Fed officials, led by Chair Jerome Powell, have said
repeatedly they expect price pressures to be transitory and
monetary stimulus to stay in place for some time, but investors
are wary that a strong pandemic recovery could force the Fed’s
hand.
Vice Chair Randal Quarles and Governor Lael Brainard will
both be speaking at separate events on Tuesday, while nonfarm
payrolls numbers on Friday will be even more closely scrutinized
than usual after the much-weaker-than-expected reading a month
ago.
Commonwealth Bank of Australia strategist Joseph Capurso
says that trimmed measures of inflation, which eliminate the
most extreme price changes, show the U.S. has no inflation
problem, and markets will need to unwind some of the expectation
for near-term policy tightening, which will weigh on the dollar.
The global pandemic recovery will provide an additional
headwind, he said.
“The world economy is clearly recovering, and that is going
to be bad for the U.S. dollar because it’s a counter-cyclical
currency,” Capurso said. “The U.S. dollar has been pretty heavy
in the last few weeks, and I think it keeps trending lower.”
That includes a drop to $1.24 per euro by the end
of this month, extending to $1.32 by the middle of next year.
The euro gained 0.1% to $1.22325 on Tuesday, not far from a
nearly five-month high of $1.2266 touched last week.
The dollar fell for a second day against the yen,
weakening 0.2% to 109.375. The pair had climbed as high as
110.20 on Friday, following the inflation data.

– Reuters

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