Dollar wallows at multi-month lows as Fed bangs dovish drum; euro ascendant

TOKYO: The dollar wallowed near its weakest since early January against major peers on Wednesday, as Treasury yields eased amid Federal Reserve insistence that stimulus will continue despite current inflationary pressures.

The euro traded around the key $1.2250 level, holding gains from Tuesday when it pushed as high as $1.2266 for the first time since Jan. 8, as Europe's pandemic recovery picks up pace, closing the gap with the US.

The dollar index, which gauges the greenback against six rivals, languished at 89.663 early in the Asian session, after pushing as low as 89.533 on Tuesday.

Meanwhile, traders will be watching the Chinese yuan after it rose to an almost three-year high of 6.3925 per dollar on Tuesday in the offshore market, before last changing hands at 6.4075.

New Zealand's currency is also in focus with the central bank releasing its statement on monetary policy later Wednesday.

The central bank is expected to leave rates on hold, upgrade economic forecasts and remain 'patient' on policy, but is unlikely to say anything positive for the currency.

A host of Fed officials overnight echoed the sentiments of Chair Jerome Powell that a spike in inflation will be transient and ultra-easy policy continues to be warranted.

"I have not seen anything yet to persuade me to change my full support of our accommodative stance," Chicago Fed President Charles Evans said in a speech on Tuesday.

"Right now, policy is in a very good place," San Francisco Fed President Mary Daly told CNBC the same day. "We need to be patient."

A potential test of that conviction comes Friday, with new readings on US core consumer prices and a survey of purchasing managers.

The dollar has declined over the past two months on the belief that low US rates will drive cash abroad to capture gains now that other economies are beginning to recover more quickly from the pandemic.

"Confidence in the outlook for the recovery in the Eurozone has been increasing," buoying the euro, Rabobank strategist Jane Foley wrote in a report.

"The conviction of Fed officials that this year's price pressure will be transient suggests there is no real reason to suspect any significant rowing back of monetary policy accommodations in the near-term," which is undermining the dollar, she said.

The yield on benchmark 10-year Treasury notes hovered at 1.5655%, near the 1.5540% mark reached overnight for the first time since May 7's payrolls shock.

The yen, which is also sensitive to declines in yields, hovered around the middle of its approximately 108.4-109.7 per dollar trading range this month, last changing hands at 108.75.

The Chinese yuan strengthened as far as 6.3925 per dollar on Tuesday in offshore trading, piercing the psychological 6.4 boundary for the first time since mid-2018.

China's major state-owned banks were seen buying US dollars at around 6.4 yuan in the Asian afternoon in a move viewed as an effort to cool the rally in the onshore yuan, sources said.

"Amid conflicting reports from Chinese officials in recent days about their attitude to the currency, our read here is that 6.40 is not a hard line in the sand, and that in the context of further downward pressure on the USD more generally, it will be 'allowed' to trade lower," National Australia Bank strategist Ray Attrill wrote in a report, reiterating a forecast for 6.35 yuan per dollar by end-June.