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Dollar Up, but Near a 2021 Low, as Bets on Continued Fed Dovish Stance Increase

Forex May 12, 2021 04:50
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By Gina Lee – The dollar was up on Wednesday morning in Asia, but remained near its lowest levels of 2021, as investors increased bets that U.S. inflation data will not change the U.S. Federal Reserve’s current dovish monetary policy.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies was up 0.23% to 90.332 by 11:37 PM ET (3:37 AM GMT).

The USD/JPY pair was up 0.21% to 108.84.

The AUD/USD pair was down 0.49% to 0.7802, with investors continuing to digest Australia’s big-spending budget, which was handed down on Tuesday. The NZD/USD pair was down 0.51% to 0.7237.

The USD/CNY pair edged up 0.15% to 6.4383. Meanwhile, the GBP/USD pair edged down 0.19% to 1.4114, remaining above the 1.4 mark.

The dollar fell to its lowest level in two months against the euro during the previous session, as Tuesday's Zentrum fur Europaische Wirtschaftsforschung Economic Sentiment Index read a better-than-expected 84.

Worries that higher U.S. inflation numbers could pressure the Fed to hike interest rates sooner than expected drove a selloff in rate-sensitive tech stocks earlier in the week. However, repeated assurances from Fed officials, including Chairman Jerome Powell, have seemingly soothed market worries.

"As long as the equity market doesn't experience a more drastic correction, the dollar is unlikely to get a safe-haven bid," National Australia Bank (OTC:NABZY) senior currency strategist Rodrigo Catril told Reuters.

"We know now that the Fed is very much firmly committed to easy policy... everybody else has come out firmly saying it's not the time...and that's a dollar negative story,” he added.

Comments made by several Fed officials during the week neutralized Dallas Fed President Robert Kaplan's mention of tapering support in April.

St. Louis Fed President James Bullard said on Tuesday he expects inflation could stay as high as 2.5% next year, while Fed Governor Lael Brainard said the previous week’s weak employment data, including non-farm payrolls, is an indication that the U.S. economic recovery from COVID-19 still has a long way to go.

"Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions," Brainard added.

The recent surge in commodities that drove gains in commodity-linked currencies also put pressure on the dollar. However, currencies such as the Australian and New Zealand dollars cooled their gains just short of ten-week highs. The Canadian dollar was just below Tuesday’s almost four-year high.

An improving outlook for global growth that is diverting investors’ cash to emerging markets, alongside a large and growing deficit in both U.S. trade and the current account sending dollars overseas, also capped gains for the greenback.

Dollar Up, but Near a 2021 Low, as Bets on Continued Fed Dovish Stance Increase

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