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Dollar Weakens as Fed Officials Point to Lower for Longer

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·2-min read
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By Peter Nurse

Investing.com - The dollar weakened in early European trade Tuesday as comments from Federal Reserve officials pointed to the central bank holding onto its ultra-easy monetary policies for some time yet.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 89.955, falling to its lowest level since late February.

EUR/USD traded 0.3% higher at 1.2183, climbing to its highest level since Feb. 26, USD/JPY was 0.1% lower at 109.08, after data showed Japan's economy contracted more than expected due to coronavirus infection, while the risk-sensitive AUD/USD rose 0.5% to 0.7802.

The dollar had pushed higher last week after consumer prices jumped sharply, suggesting the Federal Reserve would feel the pressure to rein in its accommodative policies sooner than it had guided.

However, Dallas Federal Reserve President Robert Kaplan on Monday reiterated his view that he does not expect interest rates to rise until next year, and Federal Reserve Vice Chair Richard Clarida pointed to the recent disappointing jobs report as evidence that the economy still needs help.

This boosted the growing conviction that the central bank will tolerate what it sees as a temporary acceleration in inflation for some time, to the detriment of the greenback.

Other Fed officials are due to speak throughout the week and investors will also carefully study the minutes from the Fed’s latest meeting, due for release on Wednesday, for clues as to the Fed’s monetary policy direction for the rest of 2021.

Elsewhere, GBP/USD rose 0.4% to 1.4183, climbing to its strongest since late February as investors cheer the gradual lifting of strict coronavirus restrictions.

Adding to optimism surrounding sterling, Britain's unemployment rate unexpectedly fell again to 4.8% between January and March, a period which the country spent under a tight Covid lockdown, from 4.9%.

“Cable looks comfortable above 1.4100 and barring any surprisingly hawkish comments from the Fed this week cable can test the 1.4200 area,” said analysts at ING, in a note.

Additionally, USD/CNY fell 0.2% to 6.4245, not far from last week's high which was the highest level for it in nearly three years, while EUR/HUF dropped 0.3% to 350.13 after comments from officials at Hungary’s central bank suggesting a hike in the benchmark rate could be coming in June.

“This has surprised markets that had felt the NBH would be late to hike and this news could send EUR/HUF towards the 350 area,” ING added.

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