LDN - Business

Dollar slides on expectations of less hawkish Fed, euro at 1-month high

[October 26, 2022] By Alun John

LONDON (Reuters) - The euro climbed back above parity against the dollar for the first time in a month on Wednesday after poor U.S. economic data reinforced speculation that the Federal Reserve will slow its interest rate hikes, sending the greenback tumbling.

The European common currency rose as high as$1.0048, the highest since Sept. 20, and was last up 0.5% at $1.100215.

Sterling rose 0.9% to $1.1574, its highest since Sept. 14, extending the previous day's 1.6% gain when markets took succour from Rishi Sunak becoming Britain's prime minister, and the dollar also fell against the Japanese yen, sliding 0.6% to 147.0.

"It's a continuation of the (dollar) sell-off that we've seen since the end of last week. Markets are anticipating a potential slowdown in the pace of Fed hiking," said Lee Hardman, a currency analyst at MUFG.

"We don't think that's going to happen at the next meeting in November, but certainly by December there's a higher probability they could step down the pace to 50 basis points rather than the 75 basis points we've seen recently."

The aggressive pace of Fed tightening has sent the dollar higher this year.

Fed officials have begun sounding out their desire to slow the pace of increases soon, according to a Wall Street Journal report on Friday that caused markets to reprice.

MORTGAGE RATES

This was reinforced by Tuesday data showing that U.S. home prices sank in August as surging mortgage rates sapped demand, in the latest sign that Fed rate increases are already working to slow the world's biggest economy.

Traders and economists predict another 75 basis point increase next Wednesday, but there is a growing view that it will slow to half a point in December.

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U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

The benchmark 10-year U.S. Treasury yield continued its descent from last week's multi-year high of 4.338%, and was last down four basis points at 4.069%.

The Canadian dollar also firmed to as much as 1.3512 per U.S. dollar, its strongest in three weeks, ahead of a Bank of Canada policy meeting late in the day at which analysts polled by Reuters expect a rate increase of 50 basis points.

That would be the second consecutive reduction in the size of rate rises after a 100 basis point move in July and 75 basis points last month.

The dollar was also weaker elsewhere, falling around 0.5% on both the Norwegian and Swedish crowns, and over 1.5% on China's offshore yuan, while the onshore yuan finished the domestic trading session at 7.1825 per dollar, the strongest close since Oct. 12.

Market participants became cautious after major state-owned banks were spotted selling the dollar in the previous session to stabilise the market, traders said, wondering if the yuan has reached its peak weakness for the time being.

The Australian dollar rose 1.24% to $0.64735 as hotter-than-expected inflation data put pressure on the Reserve Bank ahead of a rate decision next week.

Cryptocurrencies extended their sharp rallies from the day before. Bitcoin was 12.83% higher at around $20,700, and ether was up 5.1% just above $1,500, building on Tuesday's 8.7% surge.

(Reporting by Kevin Buckland in Tokyo and Alun John in London; Editing by Jamie Freed and David Holmes)

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