Dollar Holds Its Gains as Fed Set for Lengthy Inflation Fight

Dollar Holds Its Gains as Fed Set for Lengthy Inflation Fight
U.S. Dollar banknotes are seen in this illustration taken on July 17, 2022. (Dado Ruvic/Illustration/Reuters)

HONG KONG—The dollar touched a three-week high on Thursday after minutes from the Federal Reserve's July meeting pointed to U.S. interest rates staying higher for longer to bring down inflation.

The stronger greenback caused the pound briefly to dip below $1.2 in early European trading, its lowest in three weeks, the euro to drop to as low as $1.0146 and the Japanese yen to drift down to 135.45 per dollar.

This pushed the dollar index as high as 106.96, its highest since late July.

In the course of morning trading, however, the euro, sterling, and yen all pared their losses, recovering to trade flat on the day, leaving the dollar index at 106.65.

Thomas Poullaouec, head of multi-asset solutions APAC at T. Rowe Price, said he expected the dollar would "keep on smiling."

"The 'dollar smile' theory holds that the currency does well at each end of the global growth continuum, benefiting when relative U.S. growth and rates are higher as well as from being a 'safe haven' when global growth is declining—both of which are happening," he said in emailed comments.

"At this point, it appears the only thing that could slow the dollar is a pivot by the Fed, which would likely only come amid signs of much weaker growth in the U.S. or stronger evidence of receding inflation. For now it looks like the dollar will keep on smiling."

Fed officials saw "little evidence" late last month that U.S. inflationary pressures were easing, minutes released on Wednesday showed.

They flagged an eventual slowdown in the pace of hikes, but not a switch to cuts in 2023 that traders until recently had priced in to interest-rate futures.

Traders see about a 40 percent chance of a third consecutive 75 basis point Fed rate hike in September, and expect rates to hit a peak around 3.7 percent by March, and to hover around there until later in 2023.

In Asian trade, the greenback gained most against the Antipodeans, especially the Aussie, which was dragged down as weaker-than-expected wage growth weighed on Australia's rates outlook.

The Australian dollar fell to a one-week low of $0.6899, following labor data that showed falls in both employment and the jobless rate, before bouncing back to $0.6951, up a fraction.

China's yuan, meanwhile, continued to struggle as weak consumption, low confidence, anaemic credit growth, a property crisis, and restrictive COVID-19 policies have cast a long shadow over prospects for the world's second-largest economy.

The yuan fell nearly 0.2 percent to 6.788 per dollar, and also dropped below its 200-day moving average against the euro.

By Alun John
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