On Tuesday, Australia’s dollar declined after its central bank discouraged investor hopes for a hawkish pivot. This started a long week for monetary policy that included the Federal Reserve and Bank of England decisions.
The Aussie fell as much as 0.48% before trading 0.24% lower at $0.75026. Last week, it was as high as $0.75556, a level not seen since the beginning of July, as excessive inflation fuelled bets the Reserve Bank of Australia could increase the key rate for the following year.
The central bank emphasized that inflation was still too low. However, it eliminated its previous forecast that rates were unlikely to increase until 2024 and dumped a key target for the government bond in April 2024.
In the policy statement, the head of FX strategy at National Australia Bank in Sydney, Ray Attrill, said that the RBA made all effort to sound dovish. He added that in that sense, there’s an attempt to push back on market pricing, and the risk is that they might see a further decline in the Aussie dollar.
New Zealand’s kiwi dollar also weakened, losing 0.19% to $0.71706.
The same inflation dilemma distress other central banks.
The Federal Reserve move on inflation
Later on Tuesday, the Fed starts a two-day meeting to announce a tapering of its asset purchases. The BOE met with markets on the same day while pricing in a small rate hike.
Steve Englander, Standard Chartered’s head of G10 FX, said that the elephant in the room is the headline referring to inflation, higher than the (Fed) anticipated. He said they expect the FOMC (Federal Open Market Committee) to declare that the Fed is willing to act if inflation is not moving towards target levels. But it still expects inflation to decline as supply pressures ease. He added that they think investors will view this as advancing the possible timing of Fed rate hikes. As Steve Englander said, they expect FX markets to respond to the assumed Fed threat of rates starting to zero but discount inflation optimism. In his opinion, this process adds up to a dollar-positive combination of higher accurate rates and extended risk-off positions.
The dollar index, which measures the greenback against a basket of six major rivals, held almost flat at 93.926, taking a 0.26% loss from Monday.
Sterling was slipping 0.08% to $1.3648.
The euro also edged 0.06% lower to $1.15997.
The dollar weakened 0.08% to 113.918 yen, below an almost four-year peak of 114.697.
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