Dollar rally sputters as Fed sends mixed signals on inflation

The U.S. dollar vacillated below an 11-week high versus major peers on Thursday as traders attempted to navigate conflicting signals from Federal Reserve officials on the timing of a withdrawal of monetary stimulus.

The dollar index , which measures the greenback against six rivals, stood at 91.847 in Asia after rebounding from as low as 91.509 on Wednesday. It was as high as 92.408 at the end of last week, the strongest since April 9.

The U.S. currency got some support overnight as two Fed officials said that a period of high inflation in the United States could last longer than anticipated, a day after Fed Chair Jerome Powell had played down rising price pressures.

Atlanta Fed President Raphael Bostic and Fed Governor Michelle Bowman said that while they largely agree recent price increases will prove temporary, they also feel it may take longer than anticipated for them to fade.

The dollar index jumped as much as 2.1% last week after the Fed surprised markets on June 16 by saying that policymakers are forecasting two interest rate hikes in 2023.

But the index gave up about a third of those gains after Powell on Tuesday said that inflation is climbing due to a “perfect storm” as the economy reopens from the COVID-19 pandemic, and that those price pressures should ease on their own.

Six Fed officials are due to speak on Thursday, including New York Fed President John Williams, who on Tuesday said any conversation about when to adjust interest rates is still far off.

“The market has shifted back into price discovery mode, reflecting the Fed’s recent shift and the need to fine-tune the taper lift-off date,” Mark McCormick, the global head of foreign-exchange strategy at TD Securities, wrote in a client note.

“Good U.S. data will be good for the USD and bad for risk markets, owing to the impact on the tapering process. Accordingly, we still like USD dip-buying into the early parts of the summer.”

Producer price inflation data on Friday is this week’s U.S. economic focus, with consumer spending numbers also due that day, and the latest reading on jobless claims released on Thursday.

The yen weakened as far as 111.11 per dollar for the first time in 15 months on Thursday, and was last mostly flat at 111.03.

The euro was little changed at $1.19220 compared to the previous session, when it rose as high as $1.19700 for the first time in a week. It had dipped to the lowest since April 6 on Friday, at $1.18470.

“Going forward, the dollar could continue to strengthen against some of the lower yielding G-10 currencies, where the central banks are likely to lag the Fed in terms of tightening,” said Shinichiro Kadota, a currency strategist at Barclays in Tokyo. Kadota projected the yen will fall to 112 per dollar and the euro to $1.18 by year-end.

“Risks to the dollar are slightly more to the upside now.”