Currencies: Forex traders take Fed at its word as popular currency index tests 3-month low


A popular dollar index fell back below a key reading onTuesday, threatening to take out a nearly 3-month low below 90, as Federal Reserve officials largely stick to the message of easy monetary policy.

The ICE U.S. Dollar Index
a measure of the dollar against a basket of six major rivals, was down 0.4% at 89.76 after trading just one tick above the Feb. 25 intraday low of 89.68.

“The broader theme is USD (U.S. dollar) weakness, and I expect that to continue now that the dust has settled on the CPI print last week,” said Brad Bechtel, global head of currencies at Jefferies, in a note.

Bechtel was referring to last week’s consumer-price index reading, which rose a hotter-than-expected 4.2% year-over-year in April. The reading stoked a bout of volatility across markets and doubts about whether the Federal Reserve would move more quickly than it has indicated to squelch price pressures despite its pledge to let the economy run hot and inflation to run above its target of 2% as it waited for the labor market to more fully heal from the effects of the COVID-19 pandemic.

Fed officials, in public remarks since the CPI data, have largely argued that it remains too early for policy makers to begin thinking about unwinding extraordinary monetary support.

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Pressure on real, or inflation-adjusted, interest rates is calling the tune for the dollar, analysts said.

That “doesn’t mean we won’t get further inflation scares and increased confusion in the marketplace as inflation prints really high and the Fed continues to look through everything as transitory,” Bechtel wrote. “But in this environment, the real rates space should remain pinned or even a little lower and that will provide some scope for USD weakness.”

Meanwhile, the euro
the most heavily weighted rival in the ICE’s dollar index, jumped 0.6% to trade at $1.223, its highest since Feb. 25, according to FactSet. The euro is finding support as European countries get a better grip on vaccination efforts, as well as speculation the European Central Bank could move as early as next month to begin the process of scaling back its own pandemic-related emergency support measures.

“Unlike the Fed, the ECB has not put up a united front when it comes to policymakers’ views on how soon bond purchases should be dialed back and this is exacerbating the dollar’s weakness against the euro,” said Raffi Boyadjian, senior investment analyst at XM, in a note.

The British pound

was also on the rise, up 0.4% at $1.4192 in recent action.

The Bank of England earlier this month took a step toward tapering, which has the pound approaching its February high of $1.4325, Boyadian said.

With the U.K. further loosening pandemic-related restrictions on movement and activity, investors are brushing off the accelerating spread of a COVID variant that is said to have its origins in India, he said.

The dollar index is down 0.6% so far this month, leaving it with a year-to-date decline of 1.7%. It has been a choppy ride for the index in 2021, however, rebounding above 93 in March as the U.S. began outpacing the rest of the world in its vaccination effort.

A weaker dollar is generally seen as a positive for equities, though potentially a stronger boost for overseas stocks. It’s also seen providing support to commodity prices, where widespread shortages and booming prices are contributing to worries about inflation.

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