LDN - Business

Dollar hovers near peaks as Fed heads for taper

[November 03, 2021] By Tommy Wilkes

LONDON (Reuters) - The dollar hovered near recent peaks versus the euro and the yen on Wednesday as investors waited for the U.S. Federal Reserve to start unwinding its pandemic-era stimulus and to assess Chair Jerome Powell's take on inflationary pressures.

Moves were small in Asia and at the start of the European trading day in the middle of a busy week for central banks, with the Bank of England meeting on Thursday.

European Central Bank Christina Lagarde said an interest rate rise in 2022 was very unlikely because inflation was too low, sending government bond yields lower. But the euro barely budged.

Against the euro the greenback was down marginally at $1.1592, not far from the $1.1522 low reached in October and the strongest level for the dollar since July 2020.

The dollar index dipped 0.1% to 93.996 but remained close to its 2021 peak of 94.563 hit last month.

Dollar/yen traded at 113.8, near a four-year high.

The Fed is expected to announce the tapering of its $120 billion-a-month asset purchase programme in its policy statement at 1800 GMT.

Traders are focused on clues around what that means for rate rises, after a month of seismic bond market moves in anticipation of hikes as soon as next year. [US/]

Analysts are divided as to what the Fed meeting and statement will mean for the dollar, especially after the Reserve Bank of Australia on Tuesday and ECB on Wednesday both pushed back against market pricing of tighter policy.

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"The dollar bearish case today is that the tapering is widely expected and an inherently dovish Fed, concerned about upsetting the bond market, does not change its statement substantially," ING strategists wrote.

"Yet, at some point, the Fed is going to have to acknowledge that elevated inflation does not 'largely reflect transitory factors'. Many dovish central banks around the world are already doing this and should the Fed start to show greater concern about this today, U.S. rates and the dollar could get a boost."

The RBA on Tuesday abandoned its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because the bank also pushed back on aggressive pricing for 2022 hikes.

The Aussie dropped 1.2% against the dollar on Tuesday and sat at $0.744 on Wednesday, up 0.2% from the session open. The New Zealand dollar was also dragged 1% lower, but found support on Wednesday from strong labour data and hovered at $0.714, up 0.4%. [AUD/]

Money markets have dialled back expectations for a 15 basis point hike from the Bank of England on Thursday but still expect one before 2022.

Sterling recovered from a two-week low to trade 0.2% higher $1.3645.

The euro fell again versus the Swiss franc and was last down 0.3% at 1.055 francs, close to this week's almost 18-month low of 1.0548.

(Editing by Barbara Lewis and Nick Macfie)

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