Dollar pares losses as Powell signals bond taper

NEW YORK (Reuters) – The dollar pared losses on Friday after Federal Reserve Chairman Jerome Powell said the U.S. central bank should begin reducing its asset purchases soon, but should not yet raise interest rates.

Powell said employment is still too low and high inflation will likely abate next year as pressures from the COVID-19 pandemic fade, even as many market participants are concerned that rising price pressures will last longer than policymakers believe.

Investors have taken profits since the dollar index hit a one-year high last week, when concerns that inflation will remain stubbornly high for longer led investors to bring forward expectations on when the Fed will first raise rates to mid-2022.

Now, “there’s a bit of a positioning unwind taking place, we’ve obviously seen a firmer dollar since the September Fed,” said Mazen Issa, senior foreign exchange strategist at TD Securities in New York. “That also dovetails with the seasonal tendency for the dollar to soften into the end of the month.”

The Fed said at its September meeting that it will likely begin reducing its monthly bond purchases as soon as November, and signaled interest rate increases may follow more quickly than expected.

The dollar index fell 0.10% to 93.64, and is down from a one-year high of 94.56 last week. The euro gained 0.09% to $1.1636.

Data on Friday showed that U.S. business activity increased solidly in October, suggesting economic growth picked up at the start of the fourth quarter as COVID-19 infections subsided, though labor and raw material shortages held back manufacturing.

The dollar rally has also faded as investors build in expectations for sooner rate increases in other currencies.

Issa expects the dollar to regain traction, however, as global central banks push back against the aggressive repricing of rate hikes, while the Fed is likely to remain relatively hawkish and move forward with a reduction in its bond purchase program.

“Once we get the pushback from other central banks and the Fed’s committed to taper, we should see dollar dips really being shallow,” Issa said. The Aussie dollar, which is a proxy for risk appetite, gave up earlier gains and was last down 0.05% at $0.7462.

The safe-haven yen gained, though it remains the weakest performer, having dropped by almost 10% this year. The dollar was last down 0.50% against the Japanese currency at 113.42 yen.

Bitcoin dropped 2.98 percent to $60,367. The cryptocurrency set a record high of $67,017 on Wednesday, after the launch of the first exchange-traded fund that buys U.S. bitcoin futures.

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Currency bid prices at 3:03PM (1903 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 93.6380 93.7410 -0.10% 4.064% +93.7890 +93.5340

Euro/Dollar $1.1636 $1.1625 +0.09% -4.76% +$1.1656 +$1.1621

Dollar/Yen 113.4200 114.0200 -0.50% +9.84% +114.2000 +113.4400

Euro/Yen 131.97 132.50 -0.40% +3.98% +132.7900 +131.9300

Dollar/Swiss 0.9162 0.9184 -0.24% +3.56% +0.9185 +0.9152

Sterling/Dollar $1.3754 $1.3792 -0.27% +0.68% +$1.3815 +$1.3736

Dollar/Canadian 1.2370 1.2371 +0.00% -2.85% +1.2390 +1.2321