© Reuters.
By Peter Nurse
Investing.com - The U.S. dollar edged lower Tuesday, continuing the previous session’s hefty losses, while the Australian dollar recovered after early selling on the back of the Reserve Bank of Australia indicated it would keep interest rates at record low levels for longer than expected.
At 3 AM ET (0800 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, edged 0.2% lower to 96.340, after dropping 0.6% in the previous session, backing off from hit the 18-month high of 97.441 seen at the end of last week.
The dollar had soared last week on expectations of a sharp 50 basis points hike by the Federal Reserve at its March meeting as the central bank looks to combat inflation rising at levels not seen for decades.
However, Fed officials attempted to damp down these expectations on Monday.
Federal Reserve Bank of Kansas City President Esther George said the central bank could take less aggressive actions in raising interest rates by shrinking the balance sheet more forcefully, while Federal Reserve Bank of San Francisco President Mary Daly cautioned against overreacting and tightening policy too fast.
Elsewhere, AUD/USD rose 0.2% to 0.7076, rebounding after earlier dropping around 5% to 0.7036, following the February policy-setting meeting by the RBA.
The Australian central bank earlier Tuesday kept its cash rate at a record low of 0.1% and ended its A$275 billion bond-buying program as widely expected, but also surprised the market by indicating that it would be patient in terms of raising interest rates despite soaring inflation levels.
EUR/USD rose 0.2% to 1.1252, even after German retail sales dropped more than expected in December, slumping 5.5% on the month in real terms, compared with expectations for a fall of 1.4%.
USD/JPY fell 0.1% to 114.94, while GBP/USD rose 0.2% to 1.3477 after British house prices grew 0.8% in January, marking the strongest start to any year since 2005, according to mortgage lender Nationwide Tuesday.
The Bank of England holds its policy meeting on Thursday, and these strong housing prices can only add to the pressure on the central bank to hike interest rates for a second rate hike in less than two months.
An increase is almost fully priced in by money markets, limiting the scope for sterling upside, according to Dominic Bunning, HSBC’s head of European currency research, but the central bank could still deliver a hawkish surprise through its inflation forecasts and any discussion of active quantitative tightening.
“A key reason for our long-held skepticism on GBP has been the flatness of the rates curve,” he said in a note. “If the terminal rate were to be adjusted much higher, due to either of the above forces, it would provide more ammunition for rate hikes and would create a less negative backdrop for sterling.”
