Dollar drops as Fed’s Powell repeats disinflation comments, seen less-hawkish

© Reuters. FILE PHOTO: A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

By Gertrude Chavez-Dreyfuss and Rae Wee

NEW YORK/SINGAPORE (Reuters) – The dollar rose to one-month highs on Tuesday ahead of a speech by Federal Reserve Chair Jerome Powell that will be scrutinized by investors for any signals on how high U.S. interest rates may go this year.

The dollar index, which measures the performance of the greenback against a basket of six other currencies, erased session losses of up to 0.2% hit its highest since Feb. 6 of 103.93. It was last up 0.3% at 103.91.

Investors will be looking for Powell’s take on the labor market in a speech at the Economic Club of Washington due later in the day, after a sharp rise in jobs growth last week punctured hopes for a tempered Fed.

“Markets are bracing for a concerted jawboning effort as Fed officials work to convince investors that terminal rates could move above 5.25% – and hold around there into 2024,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

“We expect Chair Powell to emphasize stubbornness in underlying inflation pressures while highlighting the labor market’s strength and capacity to withstand higher rates.”

U.S. interest-rate futures show that markets are expecting the Fed funds rate to peak just above 5.1% by June, compared with expectations of a peak below 5% prior to Friday’s jobs report.

Friday’s jobs report wrongfooted traders who were banking on an imminent pause in the Fed’s rate-hike cycle, and gave the U.S. currency a leg up.

The euro fell 0.5% to $1.0671, having fallen to a five-week low of $1.0670.

“(Powell) has the chance to walk back some of the commentary that he made on Wednesday last week that prompted this dovish read,” said Simon Harvey, head of FX analysis at Monex, but added that he did not expect any new messaging from Powell.

“The Fed still has some progress to make, there are signs of positivity in terms of the disinflationary pressures that are in the pipeline, but there is still a labor market problem.”

Sterling was last 0.4% down against the dollar at $1.1982, after tumbling to a one-month low of $1.1974 in the previous session.

Investors are looking for further commentary from central bankers this week following what was viewed as a dovish outcome of Bank of England’s meeting last week.

The Australian dollar was up 0.2% at US$0.6895 after having surged as much as 1% after the country’s central bank raised its cash rate by 25 basis points and said more increases would be needed, a more hawkish policy tilt than many had expected.

The Japanese yen attempted to make back some of the losses over the last two sessions, with the dollar-yen pair down 0.5% at 131.925.

The yen moved away from one-month lows after a report that Japan’s government has sounded out Bank of Japan Deputy Governor Masayoshi Amamiya – considered by markets as more dovish than other contenders – to succeed incumbent Haruhiko Kuroda as central bank governor.

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Currency bid prices at 10:29AM (1529 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 103.9000 103.6000 +0.31% 0.396% +103.9600 +103.3900

Euro/Dollar $1.0673 $1.0726 -0.51% -0.41% +$1.0744 +$1.0670

Dollar/Yen 131.9000 132.6300 -0.52% +0.63% +132.7000 +131.6900

Euro/Yen 140.76 142.24 -1.04% +0.33% +142.3300 +140.7800

Dollar/Swiss 0.9257 0.9285 -0.24% +0.17% +0.9289 +0.9243

Sterling/Dollar $1.1981 $1.2022 -0.35% -0.93% +$1.2057 +$1.1962

Dollar/Canadian 1.3463 1.3446 +0.14% -0.63% +1.3468 +1.3402

Aussie/Dollar $0.6889 $0.6883 +0.10% +1.07% +$0.6951 +$0.6882

Euro/Swiss 0.9879 0.9956 -0.77% -0.16% +0.9958 +0.9881

Euro/Sterling 0.8905 0.8921 -0.18% +0.69% +0.8940 +0.8907

NZ $0.6278 $0.6305 -0.45% -1.16% +$0.6341 +$0.6274

Dollar/Dollar

Dollar/Norway 10.4115 10.3400 +0.74% +6.14% +10.4305 +10.3120

Euro/Norway 11.1134 11.0847 +0.26% +5.91% +11.1526 +11.0571

Dollar/Sweden 10.6605 10.6244 -0.09% +2.43% +10.6726 +10.5850

Euro/Sweden 11.3793 11.3901 -0.09% +2.06% +11.4052 +11.3636