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May 18, 2022
The US dollar rose, at a pace to snap a three-session losing streak, as concerns about the outlook for global economic growth and rising inflation knocked sentiment a day after Jerome Powell struck a more hawkish tone.
Powell on Tuesday pledged that the US central bank would raise interest rates as high as needed, including taking rates above neutral, to curb a spike in inflation that he said threatens the foundations of the economy.
The neutral level is the level at which economic activity is neither simulated nor constrained and is widely expected to be around 3.5% by mid-2023. On Wednesday, the dollar benefited from demand for safe havens as stocks sold and Treasury yields fell.
Yesterday's risk rally appeared, predictably, short-lived, having failed almost entirely in this morning's trading, said Michael Brown, head of market intelligence at Caxton in London.
As a result, safe haven USD demand has re-emerged, with something of a 'flight to cash' happening, with Treasuries failing to find any bids despite faltering sentiment.
The US Dollar Currency Index, which tracks the greenback against a basket of six major currencies, was up 0.4% at 103.76, on pace to snap its longest losing streak since mid-March.
Technically, it will please buyers that the dollar index has managed to hold above its previous support at 103.20, which when combined with the dismal economic backdrop should keep the USD strong for now, said Caxton's Brown.
The pound fell 1.1% against the dollar on Wednesday after data showed UK inflation rose to 9%, its highest level in 40 years. With investors taking a dim view of riskier currencies, the Australian dollar, seen as a liquid proxy for risk appetite, slipped 0.8%.
Australia's wage growth rose only a fraction in the last quarter, leading investors to reduce bets on bigger interest rate hikes. The cryptocurrency market has been pretty quiet after last week's turmoil.
Bitcoin is down about 4% and last traded at $29,094.59. Ether fell 6% to slip below $2,000. Upbeat earnings views from Home Depot and United Airlines along with optimism around China's easing of its tech and COVID-19 crackdown helped lift risk sentiment.
The dollar earlier fell for a third straight day on Tuesday, retreating from two-decade highs against a basket of major currencies, as growing investor appetite for risky bets dampened the appeal of the US currency.
The mood in markets has improved dramatically compared to last week with most asset classes bouncing and retracing moves seen last week, Brad Bechtel, global head of FX at Jefferies, said in a note to clients.
The result was a rally in equities and a fixed-income sell-off with nearly every currency in the world rallying against the USD, Bechtel said.
The dollar remained weak after data showed US retail sales rose strongly in April as consumers bought motor vehicles amid increased supply and frequented restaurants, showing no sign of easing demand despite high inflation.
The dollar index pared losses after Federal Reserve chairman Jerome Powell said at a Wall Street Journal event on Tuesday the Fed would "continue to push" to tighten US monetary policy until inflation clears the ground.
The euro was up 1% at $1.0535, extending its rebound from a five-year low touched last week, and putting more distance between the shared currency and balance with the US dollar.
Knot said that the European Central Bank will not only raise interest rates by 25 basis points in July but is also prepared to consider bigger hikes if inflation proves to be higher than expected.
Sterling also took advantage of a weak dollar to jump 1.26% to its highest since May 5 after strong labor market data reinforced expectations that the Bank of England will continue to raise rates to fight inflation.
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