Dollar falls for 2nd day on soft US data, Fed’s cautious rate hike talk

NEW YORK/LONDON: The dollar fell for a second consecutive session on Tuesday, after hitting a 19-month peak at the end of last week, on weaker-than-expected US economic data and as Federal Reserve officials pushed back against aggressive rate hikes this year, lifting risk appetite.

As the dollar eased, risk-sensitive currencies such as the Australian dollar, euro, and British pound gained.

After falling nearly 5% in January, world equities started February slightly firmer and currency markets have also changed course. Wall Street shares were also higher. A chorus of Fed officials said on Monday they would raise interest rates in March, but spoke cautiously about what might follow and indicated a desire to keep options open given an uncertain outlook for inflation.

Philadelphia Fed President Patrick Harker was equally cautious on Tuesday as he pushed back on a rate increase of half a percentage point in March, saying he would need to be convinced it was needed.

“Today is a continuation of yesterday,” said John Doyle, vice president of dealing at Monex USA, in Washington. “The dollar began to drop yesterday after what appears to be a coordinated effort by Federal Reserve officials to readjust market expectations for future interest rate hikes.”

“In our view, they essentially took a 50-basis point rate hike next month off the table.”

US rate futures have priced five hikes this year, starting in March. A 50 basis-point rate increase showed a roughly 19% probability, according to Refinitiv data.

In late morning trading, the dollar index fell 0.3% to 96.3930, after hitting a 19-month high last week.

US economic data on Tuesday came in below expectations and added to the dollar’s losses.

A measure of US manufacturing activity fell to a 14-month low in January, dropping to a reading of 57.6 from 58.8 in December amid an outbreak of COVID infections. US construction spending was also less than forecast, down 0.2%.

US job openings, a measure of labor demand, by contrast, increased to near record highs of 10.9 million in December, suggesting a deceleration in employment growth at the end of last year was largely the result of worker shortages.

The euro rose 0.1% to $1.1246.

There is a view among investors and analysts that when it comes to the rate hike trajectory in major economies, the euro may be more attractive than previously thought, according to Neil Jones, head of FX sales at Mizuho.

The European Central Bank maintains its ultra-loose monetary policy stance and has pushed back against any market expectations for ECB rate hikes this year.

Mizuho’s Jones said some of the dollar’s losses could come from the idea that the difference between the ECB and Fed may narrow.

“From the market perspective there is some thinking building that perhaps the ECB will raise rates and simultaneously that the Fed may not go as far as five hikes this year,” he said.

German inflation data on Monday was well above expectations, with consumer prices rising 5.1% year on year in January.

Elsewhere, the dollar fell against the Japanese yen, with the pair at 114.635 yen.

The Australian dollar dropped sharply overnight after the Reserve Bank of Australia (RBA) pushed back against expectations for near-term rate hikes until inflation is higher.

Britain’s pound was up 0.5% at $1.3508.