Dollar Stabilizes Below 20-Year High; Bostic Comments in Focus

Dollar Stabilizes Below 20-Year High; Bostic Comments in Focus

© Reuters.

By Peter Nurse - The U.S. dollar stabilized in early European trade Tuesday after earlier falling back from a two-decade high as traders reappraise the likelihood of aggressive Federal Reserve rate increases.

At 3:05 AM ET (0705 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, inched higher to 103.725, having risen as high as 104.19 overnight, a fresh 20-year peak.

Weighing on the dollar were comments from Atlanta Federal Reserve President Raphael Bostic on Monday, who played down talk of the U.S. central bank lifting interest rates by more than half a percentage point at its next meeting in June.

"I would say that (a 75-basis-point rate hike) is a low probability outcome given what I expect will happen in the economy over the next three to four months," Bostic told Reuters in an interview.

The U.S. Federal Reserve announced a 50 basis point hike last week, its largest increase since 2000, and expectations have been growing that the central bank will hike even more aggressively to combat inflation running at levels not seen for 40 years.

U.S. Treasury yields have climbed steadily on expectations the Fed will push interest rates substantially higher, but Bostic’s comments resulted in the yield on benchmark 10-year U.S. government notes falling back Tuesday, although it still remains over 3%.

USD/JPY traded 0.2% higher at 130.44, but still down from the fresh 20-year high of 131.34 hit overnight. EUR/USD climbed 0.1% from 1.0563, while GBP/USD rose 0.2% to 1.2354.

There will be a lot more speeches by Fed policymakers this coming week, and their comments could move the market, but a lot of attention will be on the U.S. consumer price inflation report, due Wednesday, which is expected to show that price rises slowed slightly in April.

“Lower gasoline and used car prices should knock headline and core CPI off its highs. Any larger than expected falls can perhaps suggest that the Fed need not be as aggressive in its hiking plans,” said analysts at ING, in a note.

“But some softening of the Fed tightening profile looks wishful thinking at this stage and it looks dangerous to position against further dollar strength.”

Elsewhere, USD/CNY fell 0.3% to 6.7084, just off an 18-month high after Shanghai further tightened its lockdown measures as China reiterated its zero-COVID policy.

AUD/USD rose 0.2% to 0.6967, having dropped as low as 0.6920 overnight, its weakest since July 2020, while USD/CAD rose 0.1% to 1.3014, having earlier touched $1.3037, its weakest since November 2020.