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Saturday, January 22, 2022

Dollar bulls bank on Fed losing its patience

SYDNEY: The dollar stood steady in Asia on Wednesday just hours before the Federal Reserve was expected to take a major step toward lifting interest rates for the first time in almost nine years.

A Fed statement is due at 1800 GMT, followed half an hour later by a press conference with Chair Janet Yellen. The central bank will also release members’ forecasts for inflation and interest rates, and some analysts suspect the trajectory of future increases could be lowered.

A string of strong payroll reports has left the strong impression the Fed will drop its reference to being patient on policy but still make a rate increase conditional on economic developments, in particular inflation. “Our baseline view is that the Fed can start its normalisation process around mid-year,” said Tom Kenny, an analyst at Australia and New Zealand Bank. “That said, any further drift lower in core inflation could see it delayed, as could an aggressive appreciation of the dollar,” he added.

“Yellen’s outlook for the dollar, core inflation and wages will be critical.” Fed funds have been stuck between zero and 0.25 percent since the end of 2008 and the last time the Fed raised interest rates was in mid-2006.

The contrast between the Fed and the rest of the world could not be more stark given no less than 24 central banks have eased policy so far this year.

The European Central Bank’s quantitative easing campaign is in its infancy and the Bank of Japan’s bond buying still has a year or more to run, making for a bullish background for the US dollar.

Against a basket of currencies the dollar was a fraction firmer on Wednesday at 99.627, and within spitting distance of its recent 12-year peak of 100.390.

The euro laboured at $ 1.0591, having failed to sustain a modest bounce to $ 1.0651 overnight.

Support was seen at $ 1.0551 ahead of the 12-year trough of $ 1.0457.

The dollar was also steady at 121.34 yen, mid-way between support at 120.67 and resistance at 122.02.

Sterling was under pressure at $ 1.4748 ahead of busy session that includes UK jobs data, minutes of the Bank of England’s last policy meeting and a budget from the Conservative government. The Australian and New Zealand dollars were affected by weak commodity prices, which were partly a function of the US dollar’s strength.

Copyright Reuters, 2015

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