NEW YORK: The dollar was flat to slightly higher on Wednesday, retreating from sharp gains the previous session following hawkish comments from one of the Federal Reserve’s top officials, as investors looked to the release of the US central bank’s minutes of its last monetary policy meeting.
The dollar index soared to a nearly two-year high on Tuesday after Fed Governor Lael Brainard, usually a more dovish policymaker, said she expected a combination of rate increases and a rapid balance sheet runoff to bring US monetary policy to a “more neutral position” later this year. Further tightening would follow as needed, she added.
Brainard’s comments made a big impact on the FX market, especially before the Fed releases later on Wednesday the minutes of its March meeting that are expected to provide fresh details on its plans to reduce its bond holdings.
In mid-morning trading, the dollar index, which measures the greenback’s value against six major currencies, eased to 99.43, slightly down on the day. On Tuesday, the index touched its highest since May 2020 at 99.759.
“We are just reversing a little bit of the dollar’s move higher yesterday without any particular triggers. But we’re focusing on the FOMC (Federal Open Market Committee) minutes today,” said Vassili Serebriakov, FX strategist, at UBS in New York.
“I don’t really expect a repeat of yesterday’s move in the dollar after the minutes. We have been for some time that the Fed is going to announce quantitative tightening in May. I think that minutes will confirm that,” he added, referring to Fed action to reduce its nearly $9 trillion balance sheet.
Expectations about Fed rate hikes and balance sheet reduction have boosted the dollar, rising more than 3% so far this year, in tandem with the surge in US Treasury yields.
The US 2-year yield on Wednesday hit its highest since January 2019, the 5-year yield its strongest level since December 2018, and the benchmark 10-year yield, its highest since March 2019.
The euro, on the other hand, was steady versus the dollar, after falling to its lowest level in a month against a strengthening dollar as the prospect of new Western sanctions on Russia and the upcoming French presidential election added to pressure on the European currency.
Europe’s single currency also benefited from strong euro zone producer prices for February, which surged 31.4% year-on-year in February.
The euro was last slightly higher on the day at $1.0911, after briefly touching a nearly one-month low of $1.08735.
“A new round of sanctions against Russia are expected to be announced today by the US and the EU, with any implications for energy exports likely to keep the euro under pressure,” ING FX strategists Francesco Pesole and Chris Turner told clients.
French eurosceptic, far-right candidate Marine Le Pen closing in on President Macron in the polls ahead of this month’s presidential election adds another threat to the euro.