Dollar nurses losses after dovish Powell comments

A U.S. Dollar banknote is seen in this illustration

The U.S. dollar held near one-week lows on Wednesday after U.S. Federal Reserve officials including Chair Jerome Powell reaffirmed tighter monetary policy was still some way off after a hawkish turn by the Fed last week caught markets off guard.

The dollar jumped and stocks swooned last week after the Fed surprised markets by signalling much earlier rate hikes than investors previously expected.

But policymakers have since then softened their stance with both Powell and New York Fed President John Williams warning the economic recovery requires more time before a tapering of stimulus and higher borrowing costs are appropriate.

“We will not raise interest rates pre-emptively because we fear the possible onset of inflation,” Powell said on Tuesday in a hearing before a U.S. House of Representatives panel. “We will wait for evidence of actual inflation or other imbalances.”

Their dovish comments cemented the dollar’s losses this week with the greenback shaving a third of its gains since last Wednesday.

“The risk of U.S. monetary policy being normalized sooner rather than later will continue to offer the dollar support, but it is unlikely to be the dominant factor in currency markets,” Gavekal strategists said in a note citing relative growth differentials and neutral positioning on the greenback as driving factors.

“On balance the scorecard points to a U.S. dollar that faces headwinds and is likely to remain on a depreciating track.”

Against a basket of its rivals, the greenback was flat at 91.772, holding near its lowest level since June 17 and nearly a third below a two-month high hit last week.

Only the Japanese yen was the notable loser against the greenback after data showed factory activity expanded at the slowest pace in four months in June with output shrinking fast.

The euro held steady at $1.19365.

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