The dollar fell to a two-month low on Tuesday as several Federal Reserve officials signaled that the central bank might be nearing the end of its tightening cycle. The greenback had risen last week on expectations that the U.S. central bank would raise rates again this month, but investors re-appreciated the risks to the economy and inflation from past rate hikes.
The ICE dollar index, which tracks the greenback against a basket of major currencies, dropped 0.6% to around 101.8p. Several Fed officials said on Monday that the central bank would likely need to raise interest rates further to bring down inflation. Still, the end of its current monetary policy tightening cycle was getting close. The comments prompted market participants to reduce bets on another rate rise at this month’s Federal Open Market Committee meeting, which could lower the dollar.
Meanwhile, the pound hit a 15-month high against the dollar after solid wage growth boosted expectations of more Bank of England rate rises. Average earnings rose 2.8% in the three months to June, up from 2.5% a year earlier. This pushed annual pay growth to a new record high of 2.9%, which also helped to underpin investor confidence that the U.K. was weathering the effects of the Covid-19 pandemic and was on track for strong economic growth.
A strong jobs report on Friday also supported the pound, as it highlighted the economy’s health and the labor market’s resilience. Employers added 209,000 jobs in June, below forecasts for a 240,000 increase and the lowest monthly gain since April last year.
Investors are preparing for the release of U.S. consumer prices data later on Wednesday, which will clarify whether the Fed’s latest rate-hike cycle is ending. “The USD could receive further selling pressure from markets if the CPI number reveals that the Fed has failed to achieve its inflation target,” said You-Na Park-Heger, FX strategist at Commerzbank.
U.S. stocks were mixed on Monday, with the S&P 500 gaining 0.5% to 2,548.10. The tech-heavy Nasdaq index rose 0.8% to 7,517.25. Shares in retailer Travis Perkins dived 7.4pc to a seven-month low after the company flagged that a recovery in the housing market was unlikely. Asos surged 6.9pc after RBC raised its price target on the online fashion chain.
Elsewhere, the euro gained 0.3% against the dollar to $1.208 and 0.4% against the yen to 115.54 yen. The currency was more robust against the franc, reversing losses after Swiss authorities approved more sales of controversial vaccines. The krone was also higher against the dollar and the yen, as the prospect of further gains in U.S. rates diminished the currency’s safe-haven appeal. The pound will be eyeing comments from BoE Governor Andrew Bailey and Finance Minister Jeremy Hunt on Tuesday, which could further boost expectations of more interest rate rises in the U.K.
