Dollar rally stalls, rivals pursue tentative recovery

[May 17, 2022]  By Julien Ponthus

LONDON (Reuters) - The dollar eased for a third straight day on Tuesday as a jump in sentiment across global markets encouraged investors to trim bets on the safe haven currency, which hit a two-decade high last week.

A hawkish comment from Dutch central bank chief Klaas Knot helped the euro jump back above $1.05 for the first time since Thursday, brushing off fears the common currency was on course for imminent parity with the dollar.

Knot said that not only was the European Central Bank set to hike by 25 basis point in July, the central bank was also ready to consider a bigger hike if inflation proved higher than expected.

Following these comments, the euro swiftly doubled its gains to 0.8% to $1.0527.

The currency had already benefited from ECB policymaker Francois Villeroy de Galhau arguing on Monday that a weak euro could threat price stability in the currency bloc.

Worries that escalating tensions with Russia could lead to a gas embargo, a recession in the euro zone and prevent the ECB from lifting interest rates, have weighed on the common currency's prospects.

Sterling also took advantage of the softer dollar to jump back its highest level since May 5 after strong labour market data reinforced expectations that the Bank of England would continue to raise rates to fight inflation.

The Australian dollar rose 0.87% to $0.7032, recovering further from a two-year low touched last week, and could get an extra boost from interest rate expectations if wage data beats expectations on Wednesday.

Australia's central bank considered a sharper rise in interest rates at its May meeting, minutes published on Tuesday showed, in a heavy hint it will hike again in June.

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee

The Chinese offshore yuan gained 0.68% after a steep slide that has knocked it about 7% lower since mid-April.

For all the short-term pressure, the greenback's strength is widely expected to remain a driving force in 2022 as the U.S. Federal Reserve implements a new cycle of monetary tightening.

Fed speakers on Tuesday, including Chairman Jerome Powell at 1800 GMT, will be closely watched for any clues about whether near-term rate expectations could become even more aggressive.

The U.S. currency's breather pushed the dollar index down 0.62% to 103.52, close to 1.5% below last week's two-decade high of 105.010.

"The dollar pulled back after a very strong run of gains, it's mostly stabilising at a high level," said Lee Hardman, a currency analyst at MUFG Bank.

Hardman said it was difficult to see a shift in the fundamentals that were lifting the dollar amid worries about global economic growth.

"The key driver is that the U.S. economy is outperforming the rest of the world," he said, pointing to worries about the euro zone and China in particular.

(Reporting by Julien Ponthus and Tom Westbrook; Editing by Kirsten Donovan and Alison Williams)

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