Dollar rebounds as investors heed hawkish reminder from New Zealand

SYDNEY/LONDON – The dollar rose on Wednesday, a day after suffering its biggest one-day drop in more than two years, as the excitement of the previous day’s rally in stocks and risk friendlier currencies wore off.

The dollar index was last up 0.54 percent to 110.77, after tumbling 1.3 percent on Tuesday. The index, which measures the greenback against a basket of major currencies, has fallen just under 4 percent since touching a 20-year high of 114.78 last week.

In Europe, the euro fell 0.59 percent to $0.993 after rising 1.7 percent on Tuesday. Sterling was down 0.8 percent to $1.1385, ending a solid streak which saw it rise for six straight sessions.

Recent gains for most major currencies against the dollar have been underpinned by hope among investors and traders that the U.S. Federal Reserve will raise interest rates by less than previously expected.

A bigger-than-expected fall in the number of job openings in August was taken as the latest evidence that the U.S. economy is gradually slowing. The U.S. S&P 500 stock index jumped more than 3 percent on Tuesday.

“The data is suggesting a slightly better inflation backdrop,” said Harry Adams, chief executive at foreign exchange company Argentex. “(The Fed) are unlikely to be as aggressive as they have been over the last few months,”

Adams said he expected the euro to rise back above parity as the pressure from the dollar abates. “We’re now probably going to enter a period of at least a quarter of either flat or slightly downward dollar.”

A fifth consecutive 50 basis point rate hike from the Reserve Bank of New Zealand (RBNZ) on Wednesday, however, reminded investors that inflation remains the main focus of central banks.

The RBNZ move and tone contrasted with the Reserve Bank of Australia’s surprisingly small 25 bp increase a day earlier.

“Just as RBA’s smaller-than-expected hike yesterday added to trimming of hawkish Fed bets, RBNZ’s hawkish signaling could remind markets that fighting inflation is still priority for many central banks,” said Maybank analyst Saktiandi Supaat.

“A more synchronous dovish tilt among major central banks on growth fears might be premature.”

The New Zealand dollar was last down 0.28 percent to $0.5716, having leapt as much as 1.3 percent earlier in the session. The Aussie dollar was 0.48 percent lower at $0.6471.

Japan’s yen was 0.24 percent lower at 144.49 to the dollar.

Global bond yields, which move inversely to prices, have fallen sharply in recent days, also a factor in the weaker U.S. dollar.

However, they rose slightly on Wednesday as investors took stock of the previous day’s powerful rally. The yield on the key U.S. 10-year Treasury was up 9 basis points to 3.709 percent , although it remained well below the 12-year high of more than 4 percent touched last week.

U.S. Federal Reserve Governor Philip Jefferson reiterated overnight that inflation was the top target for policymakers and that growth would suffer in efforts to bring it down.

San Francisco Fed President Mary Daly took a somewhat softer line and said the impact of the rampant dollar – which has risen about 17 percent this year – on other currencies and economies was a concern.

U.S. labor data due on Friday will be the next major indicator of the likely trajectory of the Fed’s interest rates.