The U.S. dollar dropped to the lowest level against its Canadian counterpart and teetered near multi-month lows versus other major peer currencies on May 18, as Treasury yields stalled due to renewed expectations the U.S. will not increase interest rates anytime soon. On Monday, Dallas Federal Reserve President Robert Kaplan reiterated his position. Robert Kaplan does not expect interest rates to rise until 2022. His position fueled a further decline in bets that inflationary pressure could force the Fed to act sooner.
This week several Fed policymakers are scheduled to speak and the Fed will also release minutes from its most recent meeting. Fed minutes may give indications about where monetary policy is needed.
The growing consensus is that the central bank will not change its monetary policy. The Federal Reserve most likely will tolerate what it sees as a temporary acceleration in inflation.
The dollar is struggling and this seems as a direct result of how investors feel about the U.S. inflation outlook and the Fed’s reaction. Two inflation scenarios would have different impacts on the markets. The first scenario is the current market expectation that price growth will diminish in the near future. Under the second inflation outcome, there is a high chance of a more persistent rebound of the U.S. inflation this and, potentially, early next year.
The benchmark 10-year U.S. Treasury yield stood at 1.6471%, prolonging a pullback from a five-week high reached last week.
Main currencies on Tuesday
The greenback traded above $1.22 to the euro, the single currency reaching its highest against the dollar since February 25. Also, the British pound exceeded $1.42 for the first time since February 24. The Canadian dollar added to a six-year high of C$1.2013 to the greenback, aided by a rise in oil prices. Up to 5% against its U.S. peer year-to-date, it is the best performing G10 currency on the year.
The dollar dropped 0.3% to 108.96 yen. The Japanese currency is the worst-performing G10 currency in 2021, It fell 5% year-to-date against the greenback, amid worries about the country’s slow pace of vaccinations and weakness in the greenback.
Even before Robert Kaplan’s comments, some investors were already scaling back expectations for a Fed rate hike in 2021. But Kaplan’s comments gave traders even more motivation to sell the greenback.
The onshore yuan edged up to 6.4188 per U.S. dollar. The Australian as well as New Zealand dollars gained as much as half of the percent each against their U.S. counterpart.