The dollar hit a 19-month high at the end of last week, on weaker-than-expected US economic data and as Federal Reserve members resisted aggressive rate rises this year; boosting risk appetite. Hence, the dollar sank for a second consecutive session on Tuesday.
Risk-sensitive currencies such as the Australian dollar, euro, and British pound rose as the dollar fell. World shares started in February after dropping almost 5% in January, and currency markets have also shifted course.
On Monday, a chorus of Fed officials said that interest rates would be raised in March. However, they were cautious about what may come after that; they expressed a wish to keep alternatives open given the uncertain inflation forecast. On Tuesday, Philadelphia Fed President Patrick Harker was equally cautious. He pulled back on a half-percentage-point rate hike in March. He said he would have to be satisfied it was necessary.
Federal Reserve Policies
According to Louis Navellier, chief investment officer at Navellier and Associates, the new statements reignited “the assumption that the ‘Fed put’ was still alive”. This alluded to the Fed’s tendency to soften monetary policy or push back the deadline for rising rates due to falling stock prices.
Furthermore, as the Fed attempted to temper expectations for quicker rate hikes, central banks across the world have either lifted policy rates or signaled their own tightening intentions. “Given that yield differentials have changed more in favor of the US throughout that period, the greenback’s refusal to make additional progress is rather mystifying,” noted Capital Economics’ Jonas Goltermann, senior markets economist.
However, German inflation data released on Monday was significantly above forecasts. Consumer prices climbed 5.1 %year on year in January, bolstering predictions of an ECB hawkish tilt. The dollar sank 0.6 %against the yen in other markets.
The Australian dollar fell overnight as the Reserve Bank of Australia (RBA) defied expectations of a rate hike shortly. However, the Australian dollar was recently up 0.6 %at US$0.7114. The British pound was trading at $1.3517, up 0.5 percent.
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