Dollar retreats as investors come to terms with higher-for-longer U.S. rates

SINGAPORE  – The dollar ceded some ground on Thursday as markets warmed up to the idea the Federal Reserve is likely to stay on its aggressive rate-hike path, after minutes from its last policy meeting reinforced the central bank’s hawkish rhetoric.

Nearly all Fed policymakers favored a scale down in the pace of interest rate hikes at the U.S. central bank’s last policy meeting, minutes from the Jan. 31-Feb. 1 FOMC meeting showed on Wednesday.

However, they also indicated curbing unacceptably high inflation would be the “key factor” in how much further rates need to rise.

The dollar retreated from its multi-week highs against some of its major peers in Asia trade, after a broad gain in the previous session, following the release of the minutes.

The euro rose 0.13 percent to $1.0618, away from its roughly seven-week trough of $1.0598 hit in the previous session.

The Aussie gained 0.26 percent to $0.6823, having similarly slid to a near seven-week low of $0.6795 on Wednesday, further pressured by a miss in forecasts for Australian wage growth last quarter.

Trading was thinned on Thursday with markets in Japan closed for a holiday.

“Many central banks around the world … are trying to put an emphasis in their determination to combat inflation expectations,” said Christopher Wong, a currency strategist at OCBC.

“The higher-for-longer thematic may continue to undermine sentiment.”

Elsewhere, sterling gained 0.07 percent to $1.2053 after a 0.6- percent slide in the previous session, while the New Zealand dollar rose 0.29 percent to $0.6238.

The kiwi continued to draw some support from the Reserve Bank of New Zealand’s hawkish rate rise on Wednesday, after the central bank signalled further tightening ahead to tame high inflation.

Against a basket of currencies, the U.S. dollar index slipped 0.12 percent to 104.40, though was not far from its over one-month peak of 104.67 hit last week.

“The easy part of the short USD trade is over,” said Galvin Chia, emerging markets strategist at NatWest Markets.

“Until major releases can change the view, the market bias looks like ‘good news is bad news’ – a resilient U.S. economy is risk-negative.”

In Asia, the Japanese yen edged higher to 134.81 per dollar, with attention now on incoming Bank of Japan (BOJ) Governor Kazuo Ueda’s speeches.

Ueda will speak in parliament on Friday and next Monday, with investors looking for clues on how soon the BOJ could end its bond yield control policy.