Dollar under duress as markets temper Fed taper view

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The dollar dropped to two-week lows against a basket of major currencies on Thursday, as markets continued to chip away at its recent gains on growing doubts the Federal Reserve will scale back stimulus in any significant way next week.

The Australian dollar tumbled from a three-month high after surprisingly soft local employment numbers suggested markets may have been premature in pricing out the risk of further rate cuts.

“With threats of an immediate U.S. attack on Syria subsiding, the market focus is moving to the Fed’s meeting. The market’s conviction that the Fed will go ahead with reducing stimulus has weakened a little bit after the payroll data last week,” said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank in Tokyo.

The dollar index stood at 81.432, having fallen as far as 81.411. It has broken below its 200-day moving average and lost more than 1 percent from a seven-week peak set on Sept. 5.

The move came as U.S. Treasury yields dipped, with the benchmark 10-year slipping to 2.912 percent, pulling back from a two-year high of 3.007 percent reached last Friday.

Indeed, since Friday’s disappointing U.S. nonfarm payrolls data, markets appeared to have tempered their expectations for any aggressive moves by the Federal Reserve.

“Right now, it looks to us that investors expect about $10 billion tapering in September, combined with extremely dovish language, but no change in the timetable for ending QE,” said Steven Englander, Citi’s global head of G10 FX Strategy.

A Reuters survey of 69 economists on Monday also showed the majority expected the Fed to trim its $85 billion monthly bond-buying program by a modest $10 billion.

This has also helped many emerging market currencies recover from a recent selloff, although the threat of renewed capital outflows continues to linger.

Citi economists expect $10-15 billion of Fed tapering and no change to the withdrawal timetable, an outcome that Englander said would be neutral, or even slightly hawkish, relative to current market expectations.

Dismal Aussie data

The weakened dollar saw the euro push up to $1.3325, a high not seen since Aug. 29. The common currency, last at $1.3313, has completely recovered from a selloff last week sparked by dovish comments from the European Central Bank.

Against the yen, the dollar lost a bit of ground though it remained up a tad on the week.

The dollar shed 0.4 percent to 99.50 yen, having retreated from a seven-week high of 100.62 yen hit on Wednesday on diminishing worries about U.S. military strikes on Syria.

Asian players were taking profits in the dollar/yen ahead of holidays. Japan will have two long weekends in a row while China and Korea will also have holidays next week.

The euro’s rally against the yen has also cooled off. It slipped to 132.47 yenfrom a 16-week high around 133.37.

The Australian dollar fell 0.6 percent to $0.9267, after data showed a surprise drop in Australia’s payrolls and a rise in the jobless rate to a four-year high.

“The dismal reading signifies a further deterioration in the local labour market and signals the need for the RBA to remain accommodative for the near-term,” said David de Ferranti, market analyst at FXCM.

The New Zealand dollar had a better luck, however, after the Reserve Bank of New Zealand said interest rates will probably need to rise next year.

The kiwi jumped to a near four-week high of $0.8151 before fall in the Aussie pulled the kiwi down to $0.8120,slightly below late U.S. levels.

 

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