Dollar in holding pattern ahead of Fed minutes, US inflation test

SINGAPORE – The dollar was largely rangebound on Wednesday, though remained weighed down by dovish Federal Reserve comments, as traders awaited the central bank’s policy meeting minutes due later in the day for more clues on its interest rate outlook.

A slew of Fed officials have signaled in recent days that the U.S. central bank may not need to tighten monetary policy much further than initially thought.

Atlanta Fed Bank President Raphael Bostic said on Tuesday the central bank did not need to raise borrowing costs any further, and Minneapolis Fed President Neel Kashkari followed with similar remarks later in the day.

The greenback sat near a two-week low against a basket of currencies on Wednesday and last stood at 105.80.

Sterling rose to a three-week high of $1.23035, while the euro last bought $1.0604, not far from Tuesday’s more than two-week top of $1.0620.

“The Fed is shifting away from further rate hikes, and its tightening bias too may be dropped by December,” said Thierry Wizman, Macquarie’s global FX and interest rates strategist.

U.S. Treasury yields have similarly tracked lower following the dovish Fed comments, with the two-year yield, which typically reflects near-term rate expectations, hitting a one-month low of 4.926 percent on Tuesday. It was last at 4.999 percent.

The benchmark 10-year yield stood at 4.6407 percent.

The focus now turns to minutes of the Fed’s September policy meeting out later on Wednesday, which could offer further clues on its interest rate outlook. U.S. inflation data is due the next day.

“I think markets will be particularly interested in whether or not the (Federal Open Market Committee) will follow through with the extra 25-basis-point hike forecast in (its) latest dot plot,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

“Any comments that are perceived to be slightly dovish, I think the unwind of yields can continue and that can weigh down on the U.S. dollar more.”

China aid?

The Australian dollar rose to a more than one-week high of $0.6445 while the New Zealand dollar scaled a two-month top of $0.6056, helped slightly by a report saying China is weighing new stimulus measures, though they later reversed those gains.

The two Antipodean currencies are often used as liquid proxies for the yuan.

The Aussie was last 0.12 percent lower at $0.64235, while the kiwi fell 0.31 percent to $0.6029.

China is looking to increase its budget deficit for 2023 as the government prepares to bring a new round of stimulus to help the economy meet Beijing’s annual growth target, Bloomberg News reported on Tuesday.

“Markets are still pretty cautious about whether or not the government will introduce a large scale stimulus given they have been reluctant this past year about unleashing any large scale stimulus. So I think markets are a little bit unsure whether that report is real,” said CBA’s Kong.

“If that report is true and Chinese officials come out with a big stimulus package, that will obviously boost (the yuan) and currencies linked to the Chinese economy.”

The yuan was little changed against the dollar in both the onshore and offshore markets, with the onshore yuan last at 7.2942 per dollar.