The dollar paused for breath on Tuesday as traders looked to testimony from U.S. Federal Reserve chair Jerome Powell for guidance, after a surprise shift in the central bank’s policy outlook, while cyptocurrencies nursed heavy losses.
The greenback has gained sharply since the Fed last week flagged sooner-than-expected interest rate hikes, but dipped on Monday to hand back a little bit of that rise.
Against the euro, the dollar nursed an overnight loss of about 0.4% to steady around $1.1909. It held at 110.31 yen, and the dollar index was steady at 91.915 after a loss of about 0.5% on Monday.
The Australian and New Zealand dollars eased — after snapping losing streaks on Monday — with the Aussie down 0.2% to $0.7527 and the kiwi down 0.15% to $0.6978.
“We’ve had a meaningful shift (at the Fed) from a longtime dovish stance to now a slightly hawkish one,” said Westpac currency analyst Imre Speizer.
“We’ve had a bit of a positioning cleanout - the whole world was mega short the U.S. dollar, and that’s in good part probably been cleaned out already - and now we take a wee breath before the next move up,” he said.
Over the next few weeks the Aussie dollar could drop to around 74 cents and the kiwi to around 68 cents, he said, before they both might recover as the U.S. dollar charts a “raggedy” rise on the back of a strong U.S. pandemic recovery.
In the medium term, investors will be keenly focused on the U.S. labor market as its performance is likely to have an influence on the Fed’s attitude. In the nearer future, all eyes are on Powell who appears before Congress from 1800 GMT.
In prepared remarks he noted sustained labour market improvement and the recent increase in inflation.
New York Fed President John Williams said it was too soon to shift policy, and that he expects inflation to ease from about 3% this year to close to 2% in 2022 and 2023 - which is something markets are not so sure about.
“The Fed is nearly always late on such things,” said RBC Capital Markets’ chief economist Tom Porcelli, who thinks core inflation could be higher - just under 3% - by the end of 2022.
“That is not 2% inflation,” he said in a note, and it is going to eventually apply pressure to the Fed to move on rates.
Elsewhere on Tuesday sterling steadied at $1.3917, holding on to its overnight bounce as investors look forward to the British economy reopening further on July 19.
· Bitcoin recoups some losses in Asia after plunging on Chinese crackdown
Bitcoin regained some ground on Tuesday, a day after touching a two-week low after China’s central bank reaffirmed a crackdown on cryptocurrencies and restricted trading channels for Chinese residents.
The world's largest crypto currency was last up 4.58% at $33,000, having dropped more than 10% on Monday. Ether , the second-biggest crypto currency, was up 5.05% at $1,983 after hitting a five-week low the day before.
Monday’s sell-off was sparked by an announcement from the Peoples Bank of China saying it had summoned China’s largest banks and payment firms urging them to crack down harder on cryptocurrency trading.
· China’s renewed crypto crackdown wipes nearly $300 billion off the market as bitcoin slides
China’s renewed crackdown on the cryptocurrency industry has wiped off nearly $300 billion in value from the total digital currency market since Friday, when a major bitcoin mining hub ordered miners to shut down operations.
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