Dollar sags as investors brace for dovish Fed signals

TOKYO: The dollar wallowed near its lowest level for the week on Thursday as investors looked for hints from Federal Reserve Chairman Jerome Powell that the central bank might tweak its policy framework to help push up inflation.

Powell is scheduled to address the Fed’s annual central bankers’ conference later in the day, usually held in Jackson Hole, Wyoming, but being conducted virtually this year because of the COVID-19 pandemic.

Investors are betting the U.S. central bank will introduce a new policy framework to fight persistently low inflation as early as next month.

“If the Fed turns out to be less dovish than many have been thinking, we could see a rally in the dollar,” said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.

The dollar’s index against six major currencies stood at 92.893, near the weakest level so far this week, and not far off its two-year low of 92.124 touched last week.

Since the start of the pandemic, the Federal Reserve has expanded its balance sheet by as much as about $3 trillion, far more than the European Central Bank and the Bank of Japan.

The euro changed hands at $1.1833, near its highest level so far this week, though few market players expect a clear break from its range so far this week ahead of Powell’s speech.

The dollar slipped to 105.97, losing steam after hitting a one-week high of 106.58 on Tuesday.

“A more aggressive Fed policy tends to weaken the dollar, and the broadcasting of this policy change has already been a factor in the recent mild yen strength,” said John Vail, chief global strategist at Nikko Asset Management.

Another key focus for the yen is Prime Minister Shinzo Abe’s news conference scheduled for Friday amid rising speculation over his health.

The yen is likely to gain should Abe decide to resign, given perception that aggressive monetary easing with close co-operation between the government and the central bank, dubbed Abenomics, has been one of his trademark policies, traders said.

The British pound stood firm at $1.3211, having gained 0.9% since the start of week, while the Australian dollar was changing hands at $0.7238 up 1.1% so far this week.

The Chinese yuan was at its strong levels since January after data showed a recovery in profits at China’s industrial firms.

The offshore yuan stood at 6.8783 per dollar, near its highest level since Jan. 21.

The market appears to have shrugged off the latest signs of rising tension between the two countries.

The United States on Wednesday blacklisted 24 Chinese companies and targeted individuals it said were part of construction and military actions in the South China Sea, its first such sanctions move against Beijing over the disputed strategic waterway.