Dollar rally pauses for breath after global stocks rebound

[October 14, 2022]  By Ankur Banerjee and Harry Robertson

SINGAPORE/LONDON (Reuters) - The dollar was little changed on Friday after investors flocked back to stocks despite the previous day's red-hot U.S. inflation data, while traders remained on edge about the prospect of further intervention in Japan's yen.

Sterling slipped, after rallying sharply on Thursday on reports that the British government may soon cancel major parts of its highly contentious fiscal plans.

The dollar index was last up very slightly at 112.62, having fallen 0.6% on Thursday as investors seemingly brushed off data that showed U.S. consumer prices increased more than expected in September.

The greenback has been on a tear this year as the Federal Reserve has ramped up interest rates in an effort to tame inflation, pulling money back towards the United States. Fears about the global economy have also boosted the safe haven asset.

Yet, the stronger-than-expected inflation data on Thursday counterintuitively triggered a rally in global stock markets and a fall in the dollar.

Short-sellers in the stock market seemed to be driving the bounce in equities, which in turn pushed the dollar lower, said Bank of Singapore currency strategist Moh Siong Sim.

"I think the FX market is taking its cue from the equity market," he said.

But Japan's battered yen remained under pressure despite the brighter global mood.

The dollar was last up 0.21% at 147.53 yen, a whisker away from Thursday's 32-year high of 147.67.

Last month, Japan intervened to buy yen for the first time since 1998. Investors remained on watch for further intervention after finance minister Shunichi Suzuki on Thursday reiterated the government's readiness to take action against excessive currency volatility.

Banknotes of the euro, Hong Kong dollar, U.S. dollar, Japanese yen, GB pound and Chinese yuan are seen in this picture illustration, in Beijing, China, January 21, 2016. REUTERS/Jason Lee/

Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management, said he thought the yen could still hit 150 per dollar in the near future.

"I don't think the Ministry of Finance is targeting any specific level or line in the sand," he said. "What they are saying is they are trying to prevent excessive volatility."

The British pound fell in early London trading as investors waited to see whether the Truss government would scrap many of the unfunded tax cuts which have wreaked havoc in markets. The Bank of England's emergency bond-buying scheme was also scheduled to end on Friday.

Sterling made steep gains on Thursday but was last down 0.27% at $1.1301, with UK minister Greg Hands saying there were no plans to change anything in last month's "mini" budget.

Yet, British finance minister Kwasi Kwarteng cut short his trip to the United States, sparking speculation a U-turn was imminent.

Focus now shifts to next month's Fed meeting where it is expected to deliver a fourth consecutive 75-basis-point rate increase. Traders were also waiting for U.S. retail sales data due at 1230 GMT.

The Australian dollar was up 0.42% versus the greenback at $0.6322, coming off a two-and-a-half year low it touched in the previous session.

(Reporting by Ankur Banerjee in Singapore, Tom Westbrook in Sydney, Kevin Buckland in Tokyo, and Harry Robertson in London; Editing by Sam Holmes and Jacqueline Wong)

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