Dollar rebounds after Fed’s Powell reaffirms hawkish outlook
The U.S. dollar bounced back on Wednesday, a day after its biggest daily loss in more than two months, as U.S. Federal Reserve chief Jerome Powell struck a more hawkish tone as the central bank battles to rein in surging inflation.
Powell pledged that the U.S. central bank would ratchet up interest rates as high as needed, including taking rates above neutral, to kill a surge in inflation that he said threatened the foundation of the economy.
The neutral rate is the level at which economic activity is neither simulated nor constrained.
“It’s a strong reminder to the market that the Federal Reserve is going to be hiking interest rates, probably at a very accelerated pace, in order to regain their credibility on the inflation front,” said Jane Foley, head of FX at Rabobank.
“The hawkish Fed is the reason why sentiment this morning looks a little bit more fragile than it did yesterday.”
At 0810 GMT, the U.S. dollar index was up 0.3% at 103.59, after earlier touching a two-week low following Tuesday’s 0.9% drop.
The euro slipped 0.3% to $1.0516, reversing an earlier rise to a one-week high, a day after European Central Bank policymaker Klaas Knot said a 50 basis point rate increase in July was possible if inflation broadens.
Knot is one of the more hawkish ECB members, Commerzbank (ETR:CBKG) analysts noted, adding that his view did not necessarily reflect the majority view on the ECB board.
“Nonetheless, by making this comment Knot opens up a new line of attack for the ECB hawks,” Commerzbank analyst Ulrich Leuchtmann said in a note.
Sterling fell 0.7% to $1.2406 as data showing British inflation surged 9% last month to its highest annual rate since 1982 piled pressure on policymakers to help households facing a worsening cost-of-living crisis.
The Australian dollar fell 0.3% to $0.70075 as Australian wage growth ticked up by only a fraction last quarter, leading investors to scale back bets on larger increases in interest rates.
Figures from the Australian Bureau of Statistics on Wednesday showed its wage price index (WPI) rose 0.7% in the March quarter, missing forecasts for a 0.8% increase.
The yen rose 0.1% to 129.14 per dollar, holding steady just above the two-decade low hit last week.
Cryptocurrency markets were fairly quiet after last week’s turmoil. Bitcoin slipped about 2% and was last a fraction below $30,000. Ether was holding above $2,000 but was still down 2.9%.