NEW YORK/LONDON: The dollar eased against the euro and yen on Wednesday as concerns mounted that interest rate hikes by major central banks to contain inflation run the risk of inducing a sharp global slowdown or recession.
British consumer price inflation hit a new 40-year high at 9.1% in May, while annual Canadian inflation surged to 7.7% last month to the highest rate since January 1983, in the latest data to show consumer prices running hotter than expected.
Sterling initially lost almost 1% as it fell to a near one-week low of $1.2162, but it later pared losses. The Canadian dollar slid against the US currency, but it remained below the 1.30 level it breeched last Friday and on Monday.
Market players are torn between recognizing that central banks are tightening financial conditions more aggressively than expected a month ago or two months ago and concern about what the economic fallout is going to be, said Marc Chandler, chief market strategist at Bannockburn Global Forex.
“Sentiment is fickle partly because we’re unsure when inflation will peak,” Chandler said. “Everything is being driven by inflation, inflation expectations and central bank policy.”
The Federal Reserve is “strongly committed” to bringing down inflation and policymakers are acting “expeditiously to do so,” US central bank chief Jerome Powell said in prepared remarks for a hearing before the US Senate Banking Committee.
“Inflation has obviously surprised to the upside and further surprises could be in store,” Powell said in the remarks.
The dollar index fell 0.201%, with the euro up 0.32% to $1.0559. The Japanese yen strengthened 0.53% to 135.89 per dollar, while sterling was last 0.06% lower at $1.2265.
The safe-haven dollar has been gaining ground on most peers. The yen hit a fresh 24-year low as rising US and European bond yields contrasted with low Japanese interest rates.
“Recession fears are growing as central bankers slow demand to curb inflation. Pro-cyclical currencies are on the back foot and the dollar remains very much in demand,” said Chris Turner, global head of markets at ING.
Analysts see no immediate end to a sell-off that has seen the yen weaken 18% this year from 115.08 at the end of 2021.
The currency has been weakening as higher energy prices put pressure on Japan’s current account and because of the ever- widening gap between yields on Japanese government bonds and US Treasuries.
The Bank of Japan last week maintained ultra-low interest rates and vowed to defend its policy of yield curve control (YCC), which effectively caps the yield on the 10-year Japanese government bond at 0.25%.
“Dollar/yen is continuing to trade on the Treasury yields, which have been stable but with the 10-year staying above the 3.20% level while the Bank of Japan has done a lot to defend YCC,” said Redmond Wong, market strategist at Saxo Markets Hong Kong.