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Dollar Edges Higher; Tone Negative as Fed Remains Cautious

Published 12/04/2021, 04:59 pm
Updated 12/04/2021, 05:01 pm
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By Peter Nurse

Investing.com - The dollar edged higher in early European trading Monday, but still traded near 2-1/2-week lows as the recent decline in Treasury yields undercut support for it. 

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 92.248, after falling below 92 late last week for the first time since March 23.

USD/JPY fell 0.1% at 109.57, EUR/USD dropped 0.1% to 1.1887, GBP/USD fell 0.1% to 1.3705, while the risk-sensitive AUD/USD fell 0.2% to 0.76095.

Federal Reserve Chair Jerome Powell continued the mantra Sunday that near-term price pressures will prove transitory, and the central bank’s ultra-easy monetary policies were here to stay.

He added the U.S. economy is at an "inflection point" with expectations that growth and hiring will pick up speed in the months ahead, but also noted risks that a hasty reopening could lead to a continued increase in coronavirus cases.

This insistence that monetary support is not going to disappear shortly has resulted in the greenback and bond yields weakening after scaling multi-month peaks at the end of last month, powered by expectations the Fed would have to move as an accelerating U.S. recovery from the pandemic lifts inflation faster than expected.

The benchmark 10-year Treasury yield was at 1.65%, considerably below the  more than one-year high of over 1.77% seen at the end of March, even after Friday’s stronger-than-expected producer price data.

“By the start of this year it did look fairly obvious that consensus would need to hike U.S. growth forecasts massively following i) fiscal divergence, ii) vaccination divergences and iii) a nice growth boost from previous dollar weakness,” said analysts at Nordea, in a note. “Now all of that ought to be priced-in to some extent, and more good (and ‘unexpected’) news may be needed to propel yields – or the dollar higher.”

More U.S. data will be released during the week, including the consumer price index on Tuesday, the Fed’s Beige Book on Wednesday, and retail sales as well as industrial production data on Thursday.

Elsewhere, USD/TRY rose 0.4% to 8.1882 ahead of Turkey’s latest current account data, with pressure on the lira set to mount.

President Recep Tayyip Erdogan fired the head of the central bank late last month after he lifted interest rates sharply to protect the currency. The new governor, Sahap Kavcioglu, has pledged to deliver price stability, but it’s difficult to see how he can achieve this with Erdogan expecting interest rates to head lower at some point.

During the lira’s last bout of weakness last year, Turkey spent more than $100 billion of foreign reserves to support the currency, according to a report by Goldman Sachs (NYSE:GS), and thus the current account data will be studied carefully.

USD/INR rose 0.2% to 74.843, with the rupee hitting an eight-month low overnight as India overtook Brazil to become the second most-affected country in the world.

Indian CPI and industrial production data, due late Monday, will be studied carefully to gauge the impact on the country.

Also, USD/RUB rose 0.3% to 77.614, with a buildup of Russian forces near the border between Ukraine and Russia fueling concerns that Moscow is preparing to send forces into Ukraine again, which could result in further sanctions from the West.

 

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