Dollar sinks as equity market mood lifts, Fed in view
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[September 14, 2020] By
Sujata Rao and Ritvik Carvalho
LONDON (Reuters) - The dollar slipped on
Monday against its major peers as a wave of M&A deals lifted the mood in
global equity markets and investors looked ahead to an event-packed week
which includes a Fed meeting and the appointment of a new Japanese
premier.
The UK parliament was preparing to debate a draft bill which the
government has admitted breaches the terms of its EU divorce treat. The
currency nevertheless firmed 0.6% versus the dollar following its
weakest week since March <GBP=D3>.
The gain was partly down to the dollar index, which slipped 0.2% after
firming for two weeks straight <=USD>.
This week's U.S. Federal Reserve meeting will be its first since
Chairman Jerome Powell unveiled a policy shift towards greater tolerance
of inflation, effectively pledging to keep interest rates low for
longer.
"There will be pressure on the Fed to back up the new policy goals with
some action," said MUFG strategist Lee Hardman, noting that inflation
remained well below target.
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"Expectations are they could strengthen forward guidance, possibly by
saying rates will be on hold for 3-4 years," said Hardman, who remains
bearish on the greenback.
ING Bank said in a note to clients that the "soft" Fed policy looks
largely priced in following Powell's unveiling of the new inflation
targeting approach, and that more positive news would be needed to push
cyclical currencies higher and the dollar lower.
"With fragile equity markets and risk sentiment, it is unlikely to
happen this week, in our view," the bank said.
"This suggests a range-bound dollar index this week."
Speculators trimmed net short dollar positions for the second straight
week to $32.67 billion, according to Reuters calculations and Commodity
Futures Trading Commission data. That's off nine-year highs of $33.68
billion in late August
Analysts at Standard Chartered said there was a risk the Fed would
disappoint dollar bears.
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U.S. Dollar banknotes are seen in this photo illustration taken
February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration
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"Having set aside yield curve control as a near-term policy option, the FOMC
does not seem to have an operational consensus on how to use the balance sheet,"
they told clients. "This may disappoint investors."
The data showed net euro longs inched higher but remained off record highs
touched a few weeks ago.
The single currency had spiked to a one-week high above $1.191 after Thursday's
European Central Bank meeting, before easing back as policymakers talked it down
the next day.
It was trading around $1.187 on Monday <EUR=EBS>.
The yen meanwhile rose 0.2% to around 105.92 yen <JPY=D3> to the dollar, a
five-day high. The Bank of Japan's meeting on Thursday is not expected to yield
any policy changes but the bank may be quizzed on whether it could follow the
Fed's inflation stance.
The Reuters Tankan survey on Monday found Japanese manufacturers pessimistic for
the 14th straight month in September, underlining the challenge the country's
next leader faces after the economy sank into its deepest recession ever.
Chief Cabinet Secretary Yoshihide Suga was picked to head Japan's ruling party
on Monday, meaning that on Wednesday in parliament he is set to be selected by
his peers as prime minister, taking over from Shinzo Abe.
Suga has vowed to continue Abe's policies.
"The focus is on the line-up of his cabinet as well as whether he will call a
snap election," said Minori Uchida, chief FX strategist at MUFG Bank. "He is
saying he will continue and advance Abenomics, but it is questionable how much
advancement he can make."
(Reporting by Sujata Rao, additional reporting by Ritvik Carvalho in London and
Hideyuki Sano in Tokyo; Editing by Susan Fenton and Hugh Lawson)
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