Dollar rally stalls on talk of more dovish Fed chair
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[October 04, 2017]
By Jemima Kelly and Fanny Potkin
LONDON (Reuters) - The dollar dropped back
from seven-week highs on Wednesday, amid speculation that U.S. President
Donald Trump's choice for the next head of the Federal Reserve could be
a less hawkish candidate than had previously been expected.
The greenback had reached its highest since mid-August against a basket
of major currencies <.DXY> on Tuesday, driven by stronger economic data,
as well as expectations for another Fed rate hike by the end of the year
and a revival of the so-called "Trumpflation trade".
But it fell across the board on Wednesday, with investors concerned that
the Fed might be set to take a more dovish turn after a Politico report
that Fed Governor Jerome Powell is favored over former governor Kevin
Warsh by U.S. Treasury Secretary Steven Mnuchin.
While both are seen as serious candidates to replace current Chair Janet
Yellen when her term expires in February, Powell is seen as more dovish
than Warsh, who has criticized the Fed's bond-buying program in the
past.
"Only a couple of days ago everyone was going for Warsh as successor,
who the market saw as standing for a much tighter U.S. policy," said
Commerzbank's head of currency research in Frankfurt, Ulrich Leuchtmann.
"Now everyone is thinking that Powell is the more likely choice and
thinking of Powell as someone who will do very very gradual policy
incrementations. Warsh is seen as sort of positive, Powell as a negative
basically - that's the most important factor at the moment."
The euro <EUR=> climbed a quarter of a percent to $1.1770, off Tuesday's
1-1/2-month low of $1.16955.
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A U.S. Dollar note is seen in this June 22, 2017 illustration photo.
REUTERS/Thomas White/Illustration
It has been dogged this week by worries over Catalonia, after a violence-marred
independence referendum. But the common currency appeared largely unruffled by
the region's leader saying late on Tuesday that Catalonia would declare
independence in a matter of days - comments that weighed Spanish bond prices.
"The political risk premium being priced into the euro is very small – in our
view that’s too small and the risk is that we see some independent euro weakness
on the back of that going forwards," said RBC Capital Markets' head of currency
strategy Adam Cole, in London.
"But at the moment the (currency) market just doesn’t seem to care. The
underlying assumption is that ultimately the constitutional court has ruled that
the referendum is not legally binding, and that view will prevail."
The dollar index slipped by a quarter of a percent to 93.437 <.DXY>, off a
seven-week high of 93.92 touched on Tuesday following strong U.S. manufacturing
figures.
Money market futures were pricing in about a 70 percent chance of a rate hike by
December.
The dollar dipped 0.3 percent to 112.46 yen.
(Reporting by Jemima Kelly and Fanny Potkin; Additional reporting by Hideyuki
Sano in Tokyo; Editing by Toby Chopra)
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