Forex: Dollar sags as bets build for less hawkish Fed; Aussie firms after CPI

Applied Energetics

26/10/2022 06:35

By Kevin Buckland
       TOKYO, Oct 26 (Reuters) - The dollar wallowed near a
three-week low versus major peers on Wednesday as more signs of
economic weakness in the United States fanned speculation about
a less hawkish Federal Reserve.
    The Australian dollar strengthened to just shy of the
previous session's 2 1/2-week high as hotter-than-expected
inflation data put pressure on the Reserve Bank ahead of a rate
decision next week.
    Sterling hung close to the six-week peak reached on Tuesday
after new British Prime Minister Rishi Sunak pledged to lead the
country out of an economic crisis, and stuck with Jeremy Hunt as
finance minister.
    The euro also remained near a six-week high, trading less
than half a cent from parity with the greenback. The European
Central Bank decides policy on Thursday and is widely expected
to raise rates by 75 basis points.
    The dollar index  =USD  - which measures the currency
against six peers, including sterling, the euro and the yen -
was little changed at 111.01, near the previous session's trough
of 110.75, the lowest level since Oct. 5.
    Data overnight showed that U.S. home prices sank in August
as surging mortgage rates sapped demand, amid recent signs that
Fed rate increases are already working to slow the world's
biggest economy.
    Traders and economists predict another 75 basis point
increase next Wednesday, but the view is growing for a slowing
to half a point in December.  FEDWATCH 
    "I'm still in two minds as to whether we can say we've seen
a peak in the U.S. dollar," but "evidence of a slowdown is
building," said Ray Attrill, head of FX strategy at National
Australia Bank.
    "If the market gets really comfortable with a Fed pivot - if
that's what stepping down to 50 basis points is, and potentially
ending a tightening cycle south of 5% early next year - then it
will be time to call time on U.S. dollar strength, but I'd like
to get through the Fed messaging next week before coming to that
conclusion."
    U.S. long-term Treasury yields continued their descent from
last week's multi-year highs at 4.338%, declining to 4.0941% in
Tokyo. 
    That put pressure on the dollar versus the yen  JPY=EBS 
because of its sensitivity to U.S. rates, although it managed a
0.22% gain to 148.265, clawing back some of its 0.7% slide on
Tuesday.
    The dollar reached a 32-year high at 151.94 yen on Friday,
but was then beaten back as far as 144.55 amid two bouts of
suspected Bank of Japan (BOJ) intervention either side of the
weekend.
    Even so, fundamentals still favor a weaker yen, with the BOJ
expected on Friday to keep stimulus settings unchanged, running
counter to monetary tightening by developed-market peers.
    The euro  EUR=EBS  slipped 0.13% to $0.9957, after jumping
to its highest since Oct. 5 on Tuesday at $0.9995.
    Sterling  GBP=D3  eased 0.16% to $1.1454, but was still
close to Tuesday's high of $1.1500, a level last seen on Sept.
15.
    "With Jeremy Hunt confirmed reappointed as Chancellor, we
judge the political discount to GBP is fading," Joseph Capurso,
a strategist at Commonwealth Bank of Australia, wrote in a
client note.
    "However, GBP retains a number of headwinds such as a
looming recession and a growing current account deficit," he
added.
    The Australian dollar  AUD=D3  added 0.11% to $0.6401, just
short of Tuesday's top of $0.6412, the strongest since Oct. 7.
    The RBA decides policy on Tuesday, and is now under pressure
to either roll back a decision to slow the pace of rate hikes
from the previous meeting, or to run its tightening campaign for
longer. Both NAB and ANZ raised their forecasts for the RBA's
terminal rate following the data.
    But while that should lend the currency some support, it has
also been battered by poor risk sentiment amid weakness in
global stock markets and economic worries around top trading
partner China.
    "It may take some time for the cloud of gloom over China to
lift from AUD," said Sean Callow, a senior FX strategist at
Westpac.
    "A further pullback in the U.S. dollar seems to be the
Aussie's best chance of sustaining pushes above $0.64.
Otherwise, it's back to trading either side of $0.63."
    Cryptocurrencies were firm after sharp rallies on Tuesday
amid dollar weakness. Bitcoin  BTC=BTSP  was 0.35% higher at
$20,157 after a 3.9% jump overnight. Ether  ETH=BTSP  was up
1.3% at $1,479.40, building on Tuesday's 8.7% surge.
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 (Reporting by Kevin Buckland. Editing by Gerry Doyle and Jamie
Freed)