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Dollar near one-month low as Fed minutes point to rates pause

The dollar hovered near a one-month low on Thursday as minutes from the Federal Reserve’s May meeting confirmed the potential for a pause in rate hikes after likely further increases in June and July.

The dollar index =USD – which measures the currency against six major peers – edged 0.1% higher to 102.15 as a decline in Asian equities fostered demand for safe havens like the greenback.

However, the index has mostly been consolidating around 102 after a short-lived bounce to 102.45 immediately following Wednesday’s release of the minutes.

Analysts said there was nothing to suggest a further ramp up of the Federal Open Market Committee’s already hawkish stance. Wall Street rallied overnight on that outlook, while long-term Treasury yields held steady.

Atlanta Fed President Raphael Bostic had already suggested earlier this week that a pause might be the best course of action in September to monitor the effects on the economy following two more 50-basis-point hikes in June and July.

The dollar index reached a nearly two-decade peak above 105 mid-month, but signs that aggressive Fed action may already be slowing economic growth have prompted traders to scale back tightening bets, with Treasury yields also dropping from multi-year highs.

The 10-year Treasury yield US01YT=RR tracked sideways in Tokyo at 2.75%, continuing its consolidation around that level this week.

“A soft DXY backdrop is forming (although) it’s still too early to call a long-term DXY peak,” Westpac strategists wrote in a client note, referring to the dollar index.

“DXY could range for a bit, but retracements into the 101 level are a buy.”

The dollar added 0.08% to 127.425 yen JPY=EBS, while the euro EUR=EBS was about flat at $1.0679. Sterling GBP=D3 slipped 0.17% to $1.25615.

The risk-sensitive Aussie AUD=D3 sank 0.25% to $0.70695. The New Zealand dollar NZD=D3 dropped 0.31% to $0.6458, after shedding most of the gains following Wednesday’s hawkish Reserve Bank of New Zealand meeting outcome, which had lifted it to a three-week top of $0.6514.

The dollar’s safe-haven appeal should keep it bid going forward, according to Commonwealth Bank of Australia strategist Kristina Clifton.

A strong commitment to fight inflation and a willingness to take monetary policy to restrictive levels “suggest the FOMC may fail to deliver a soft landing for the U.S. economy (and) signs the U.S. economy is losing momentum will support the USD and the JPY,” she wrote in a research note.
Source: Reuters (Reporting by Kevin Buckland; Editing by Sonali Desai and Sam Holmes)

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