Dollar Steadies as Traders Look to Cenbanks for Guidance

Dollar Steadies as Traders Await Central Bank Guidance

By Tom Westbrook

SINGAPORE (Reuters) – The dollar has bounced off recent lows and was firm in choppy trade on Tuesday ahead of a handful of data releases and central bank meetings which investors expect to guide the rates outlook.

The euro fell 0.3% overnight on softer-than-forecast German business morale and expectations that the European Central Bank (ECB) will stay dovish when it meets on Thursday.

The euro last bought $1.1598, near a one-week low.

Other overnight moves were modest, with the dollar easing a tad on the Aussie, kiwi and sterling. It was steady on Tuesday save for a small rise on Japan’s yen to 113.83 yen, and a slight dip on the Aussie.

The U.S. dollar index rose held at 93.856.

“The dollar looks to be finding its feet in the mid-93s,” analysts at Westpac said in a note, as focus turns to the ECB’s meeting as well as U.S. growth data due on Wednesday.

“The focus will turn to the ECB and U.S. Q3 GDP this week. The ECB likely underscores dovish guidance, while US GDP will show the rebound stalling, but price pressures continuing to build,” they said, setting the scene for the Federal Reserve to announce a reduction in bond purchases as soon as next week.

“All told that should keep short-term yield spreads trending in the dollar’s favour and leave the dollar with a bid tone in the next several weeks.”

Central bank meetings in Japan and Canada are also scheduled this week, as is the release of quarterly inflation data in Australia where rates markets are at odds with the resolutely dovish Reserve Bank of Australia (RBA) over the outlook.

The Australian dollar edged up to $0.7503 after having climbed as far as $.07546 last week, its highest since July. The kiwi held at $0.7165.

Economists expect growth in Australia’s trimmed mean consumer prices, the central bank‘s preferred measure, to have accelerated to an annual pace of 1.8% in the September quarter from 1.6% in the preceding three months.

Inflation in Canada has also put pressure on the central bank to pull forward rate hikes and traders are watching Wednesday’s meeting for any hawkish clues.

The Canadian dollar stands at C$1.2383 per dollar, having scaled a four-month peak last week, while the gap between Canadian and U.S. 2-year yields has doubled since last month to 41 basis points in favour of the Canadian bond.

“Any hawkish undertones would get me over-excited about a return to 1.20 again,” Societe Generale strategist Kit Juckes said.

The Bank of Japan also meets over Wednesday and Thursday, and sources have told Reuters that it is discussing phasing out a COVID-19 loan programme, though a decision before December is unlikely and no policy changes are expected this week.

Beyond Friday, the Fed, the RBA and the Bank of England meet next week with markets having priced a roughly 60% chance that the Bank of England raises interest rates to head off inflation.

Sterling has been firming at the prospect of higher rates and was last steady at $1.3758.

“Small open economies are prone to importing price rises, which could enter the inflation equation early,” said ANZ Bank‘s senior international economist Brian Martin.

“Monetary tightening is justified in this environment. The UK is a case in point and the Bank of England looks poised to join the early rate tighteners soon. We have brought forward, to this quarter, the time when we expect the BoE to start rate normalisation.”

(Reporting by Tom Westbrook, Editing by Himani Sarkar)