The
recent rise in inflation expectations as investors bet on a
post-pandemic economic recovery and the so-called "reflation"
trade has lifted U.S. government bond yields. That had fed
through to a higher dollar until earlier this month when the
greenback resumed its decline.
Analysts expect Powell, who testifies before Congress at 1500
GMT, to provide some reassurance that the Fed will tolerate
higher inflation without rushing to raise rates. That might calm
bond markets and eventually weigh on the dollar, they said.
"Mr. Powell will very likely reiterate that the Fed is a long
way from meeting its goals and that it will likely take some
time before "sufficient progress" has been made to taper its
bond purchase program," UniCredit analysts said.
The dollar index was last at 90.143, up 0.1% on the day, having
earlier fallen to 89.941, its weakest since Jan. 13.
Graphic: U.S. dollar index -
https://fingfx.thomsonreuters.com/
gfx/mkt/azgpoezeopd/dollar%20index.PNG
Positioning data shows investors overwhelmingly betting that a
U.S. dollar, which has been dropping since last March, will keep
falling as the world recovers from the COVID-19 pandemic.
"Only when the spike in U.S. yields becomes more disorderly and
spills forcefully into risk assets, would U.S. dollar experience
an across-the-board strength," said ING analysts in a research
note.
The euro weakened 0.1% to $1.2151. Euro zone government bond
yields have also been rising but the rally took a brief pause
after European Central Bank President Christine Lagarde said on
Monday the bank was "closely monitoring" rising borrowing costs.
Commodity-linked currencies have been among the best performers
in 2021. Surging prices for materials from oil and copper to
lumber and milk powder have pushed currencies such as the
Canadian, Australian and New Zealand dollars to their highest in
roughly three years.
On Tuesday, the Aussie traded down 0.2% at $0.7903 having
earlier hit a high of $0.7934. The New Zealand dollar was down
marginally while the Canadian dollar was just below its Monday
high.
Sterling hit a new nearly three-year high of $1.4098, up 0.3% on
the day, as investors stuck with their bets that a rapid rollout
of the COVID-19 vaccine would allow the British economy to
reopen over the next few months.
Prime Minister Boris Johnson laid out his step-by-step plan for
ending the current British lockdown on Monday.
Bitcoin, the world's biggest cryptocurrency, fell sharply below
$45,000 and was last down 15% at $45,953, extending its drop
from a record set on Sunday of $58,354 as investors grow nervous
about sky-high valuations.
The Japanese yen, the worst performing major currency of 2021
because rising U.S. Treasury yields can lure investment from
Japan, fell again. The dollar was last up 0.2% at 105.26 yen per
dollar.
(Additional reporting by Tom Westbrook in Singapore; editing by
Emelia Sithole-Matarise)
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