The dollar nursed losses near a six-week low on Tuesday and commodity-linked currencies loitered around multi-year highs, as investors’ focus shifted to how U.S. Federal Reserve chief Jerome Powell might respond to resurgent inflation expectations.
Surging prices for materials from oil and copper to lumber and milk powder have pushed currencies such as the Canadian, Australian and New Zealand dollars to their highest in roughly three years.
However the gains have come with a worldwide rise in inflation expectations and a big sell-off in longer-dated bonds.
Traders expect Powell, who testifies before Congress at 1500 GMT, to provide some reassurance that the Fed will tolerate higher inflation without rushing to raise rates. That might calm bond markets and eventually weigh on the dollar, they said.
“I think he will talk up the downside,” said Commonwealth Bank of Australia currency analyst Joe Capurso in Sydney.
“If anything, I think he will give markets a bit of a cold shower and say: ‘Mr Market you’re getting a bit ahead of yourself. There are plenty of risks…and the U.S. economy is long, long way from full employment.’”
Asia trade was dampened by a public holiday in Tokyo, but renewed confidence that low U.S. interest rates will not rise anytime soon could clear the way for further gains in trade-exposed currencies at the dollar’s expense.
Positioning data shows investors overwhelmingly betting that a U.S. dollar that has been dropping since last March will keep falling as the world recovers from the COVID-19 pandemic, even if short holdings have been trimmed slightly in recent weeks.
“The broad dollar retains a heavy tone, expect the dollar index to continue testing the 90.00 support,” said OCBC Bank strategist Terence Wu.
“Selling pressure remains strong for now. We turn slightly more cautious, but if dollar-negative views are still to be expressed, (we) prefer to do it through commodity currencies.”
The U.S. dollar index fell to 89.941 on Tuesday, its lowest since mid-January. The Australian dollar briefly hit its highest since early 2018, buying $0.7934, while the kiwi held steady around $0.7320. The Canadian dollar held just below Monday’s near three-year high.
The euro made a small gain to $1.2167 and is poised to re-test resistance around $1.2220.
Sterling, which has rallied nearly 3% this year as a speedy vaccine rollout has inspired confidence in the prospect of a British economic rebound, held above $1.40 at $1.4072.
The Japanese yen, which has been the worst performing major currency of 2021 because rising U.S. Treasury yields can draw investment from Japan, steadied at 105.02 per dollar.
Elsewhere bitcoin dropped as far as 6%, but has found support above $50,000 after a wild overnight ride where it traded in a $10,000 range and dropped as low as $47,400.