Dollar slips as bets mount for less hawkish Fed

SINGAPORE  – The dollar retreated on Thursday as market expectations mounted that the Federal Reserve will tone down its aggressive stance on interest rate hikes, pushing the euro further above parity and lifting its other major peers to multi-week highs.

The euro peaked at $1.00935 and sterling at $1.1645 in early Asia trade, both their highest since Sept. 13.

Sterling was little helped by the British government’s delay in the announcement of its plan to repair the country’s public finances to Nov. 17, on the basis of ensuring that the programme reflected the latest and most accurate economic forecasts.

Against the Japanese yen, the greenback fell 0.2 percent to 146.11.

“Our sense is that fundamentally, there are factors that are still favouring the U.S. dollar: rate differentials, the fact that the Fed still has more work to do,” said Rodrigo Catril, senior currency strategist at National Australia Bank.

“But certainly near term, given how much was priced, we’ve seen a bit of retracement in the dollar … Our sense is that it’s a bit of a consolidation of the recent moves rather than extension of further dollar declines.”

Looking ahead to next week’s FOMC meeting, markets are expecting another 75 basis point hike, although sentiment is building that the Fed will opt for a smaller increase in December.

Housing data released this week, which showed that U.S. single-family home prices sank in August and sales of new U.S. single-family homes dropped in September, added to the case that the Fed’s aggressive tightening cycle is already working to slow the economy.

Overnight, the Bank of Canada announced a smaller-than-expected interest rate hike and said it was getting closer to the end of its historic tightening campaign.

The Canadian dollar last traded at 1.3549 per U.S. dollar.

Against a basket of currencies, the U.S. dollar index was up 0.06 percent at 109.63, following a 1.1-percent fall overnight.

The main focus on Thursday will be a rate decision by the European Central Bank, with markets expecting it to deliver a 75 bp rate hike.

“What the ECB says will be important,” said National Australia Bank’s Catril.

“The question is whether they want to … show that full commmitment to the inflation mandate, or whether they show weakness or concerns in terms of what looks to be a challenging growth outlook.”

Meanwhile, the Aussie was down 0.12 percent at $0.6487, paring some of its gains from a 1.6 percent overnight surge.

The kiwi rose to $0.58505, its highest in more than a month, and was last up 0.19 percent at $0.5842.

Data released on Wednesday showed that Australian inflation raced to a 32-year high last quarter, a shock result that stoked pressure for more aggressive rate hikes by the country’s central bank.

Westpac on Thursday said it had revised up its terminal rate expectation to 3.85 percent by March, from 3.6 percent previously, and expected the Reserve Bank of Australia to raise its cash rate by 50 bp in November.