Dollar Fell to the Lowest Point for a Short Period of Time

The U.S. Dollar declined briefly to the lowest level since January 13 on Tuesday as investors’ attention shifted to how the U.S. Federal Reserve chief might respond to resurgent inflation expectations. At the same time, commodity-linked currencies hovered near multi-year highs.

Interestingly, the recent rise in inflation expectations as investors bet on a post-pandemic economic rebound. Moreover, the so-called “reflation” trade lifted U.S. government bond yields–briefly–the dollar until earlier this month.

However, analysts expect Jerome Powell to provide some reassurance that the Federal Reserve will tolerate higher inflation without rushing to raise rates. Importantly, that might calm bond markets and eventually weigh on the dollar.

Jerome Powell most likely will reiterate that the Fed is a long way from meeting its goals. Moreover, it will take some time before sufficient progress has been made to diminish its bond purchase program. 

Dollar and other important currencies

Interestingly, the dollar index was last at 90.046=USD, flat on the day, having earlier fallen to 89.941, its weakest since January 13.

People should keep in mind that, positioning data shows investors overwhelmingly betting that a U.S. dollar, which has been declining since last March, will keep falling as the world recovers from the COVID-19 pandemic. 

It is worth mentioning that, the euro rose 0.1% to $1.2168 EUR=EBS. As a reminder, the Euro zone government bond yields had also been rising, but on Monday dropped after ECB President Christine Lagarde said the bank was closely monitoring rising borrowing costs.

Interestingly, commodity-linked currencies have been among the best performers in 2021. On Tuesday, the Australian Dollar traded down a little bit to $0.791 AUD=D3 having earlier hit a high of $0.7934. Also, the New Zealand Dollar was down NDZ=03. At the same time, the Canadian Dollar was just below its Monday high CAD=03.

It is worth noting that, Sterling reached a new nearly three-year high of $1.4098 GBP=D3 up 0.3% on the day.