Dollar stabilises near seven-month lows

By Alun John

SINGAPORE/LONDON (Reuters) – The dollar steadied near its softest in seven months against the euro on Tuesday after more hawkish comments overnight from two U.S. Federal officials helped it to stem its recent losses ahead of remarks by Fed chair Jerome Powell due later in the day.

The euro was at $1.0736, little changed on the day, trading just below its seven-month high of 1.07605 hit Monday. Sterling was down 0.1% at $1.2165, just below Monday’s three-week top.

The dollar has been sliding as markets grow increasingly doubtful that the Fed will have to take interest rates above 5% to cool inflation as effects of its aggressive rate increases last year have already been felt.

Last week’s employment report showed that while the U.S. economy added jobs at a solid clip in December, it also recorded a slowdown in wage growth.

Separate data showed softer services activity, and investors now expect rates to peak just under 5% by June, before starting to come down later in the year.

However, many Fed officials continue to say rates both have further to go and will stay at elevated levels, with Atlanta Fed Bank President Raphael Bostic and San Francisco Fed President Mary Daly taking their turns on Monday.

“Markets realised they had moved quite far quite quickly and there are some risk events on the horizon,” said Simon Harvey head of FX analysis at Monex Europe, of the dollar pausing its decline.

Harvey pointed to a speech by Fed chair Jerome Powell later Tuesday, though he said the topic of the remarks – central bank independence – meant it oughtn’t be market moving, and more significantly U.S. CPI data on Thursday.

“Markets are realizing we’ve reduced exposure to the dollar ahead of CPI, and there is still a sizable risk that US inflation conditions remain more persistent and the Fed has called it right and are going to have to hold rates higher for longer,” Harvey said.

The U.S. dollar index which tracks the greenback against a basket of currencies with the euro given the greatest weight, was steady at 103.23, having tumbled 0.7% and touched a seven-month low of 102.93 in the previous session.

China’s rapid reopening of its borders following pandemic restrictions also provided another boost toward riskier assets and currencies this week away from the safe haven appeal of the greenback, particularly moving China-linked currencies.

The China-sensitive Australian dollar spiked at a more than four-month peak of $0.6950 in the previous session. It was last 0.4% lower at $0.68886.

The offshore yuan last traded at 6.7889 per dollar, after hitting its strongest in five months of 6.7590 earlier in the session.

The dollar also steadied against the yen trading up 0.2% at 132.2 yen. The Japanese currency has been broadly strengthening after the Bank of Japan’s (BOJ) surprise tweak to its yield curve policy late last year.

(Reporting by Rae Wee in Singapore and Alun John in London ; Editing by Bradley Perrett, Christopher Cushing, Angus MacSwan, William Maclean)