Dollar slips off one-month high as more cbanks signal end to stimulus

September 23, 2021

By Sujata Rao and Saikat Chatterjee

LONDON (Reuters) – The dollar slipped off one-month highs on Thursday, undermined by a cheerier mood on world markets and hawkish messages from several central banks in Europe, as Norway became the first developed nation to raise rates amid a loosening of pandemic restrictions in many countries.

The dollar had shrugged off Wednesday’s announcement by the U.S. Federal Reserve that it would start tapering off its pandemic-related stimulus “soon”.

While its messages were seen as hawkish, they were offset by an improvement in risk sentiment, especially after Bloomberg Law reported that regulators had told the indebted Chinese property firm Evergrande to communicate with bondholders to avoid default. [L1N2QP048]

The Fed’s decision to start tapering bond-buying, possibly as soon as November, was overshadowed by Norway’s quarter-point rate increase to 0.25%. The crown rallied to its highest since mid-June versus the euro to 10.07 crowns per euro while it climbed 0.7% against the U.S. dollar.

“While today’s rate decision didn’t come as a surprise to markets, the upwards revision to its projected policy path beyond June 2022 despite the sub-target inflation projection did,” said Simon Harvey, senior FX market analyst at Monex Group.

“This is what largely moved the needle for the crown this morning.”

The Bank of England’s post-meeting statement meanwhile boosted money market bets on an early-2022 rate hike, sending sterling 0.7% higher while sources told Reuters ECB policymakers were bracing for inflation to exceed estimates, paving the way to end emergency stimulus in March.

Against a basket of its rivals, the dollar weakened 0.3% to 93.2. The brunt of its losses were against the Canadian dollar and the Scandinavian currencies.

At Wednesday’s Fed meeting, nine of 18 policymakers projected borrowing costs will need to rise next year, inducing markets to bring forward the timing of the first rate rise to January 2023.

But the dollar and bond yields fell, with many seeing the Fed as having left policy wiggle room to slow down if needed.

“A lot of the dollar strength we saw on Friday and Monday was down to risk aversion. The Fed slightly raised its median (interest rate) expectations for 2023 but you are still talking of a terminal rate of 1.5%-1.7% which is ok but not situation where you get an aggressive bid for the dollar,” said Peter Kinsella, head of FX strategy at asset manager UBP.

“To get the dollar to strengthen much you need to see the front end (of the Treasury yield curve) steepen and that’s not happening.”

The gap between five-year notes and 30-year bonds fell below 100 basis points after the Fed statement, the lowest since July 2020 while the 2-year/10-year curve has flattened more than 50 bps since end-March.

In emerging markets, the Turkish lira plunged to a record low after a surprise interest rate cut that came despite inflation hitting 19.25% last month

(Reporting by Sujata Rao and Saikat Chatterjee; addiional reporting by Tom Westbrook in Singapore; Editing by Angus MacSwan and Bernadette Baum)

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