[1/2]US dollars are counted by a banker counting the currency at a bank in Westminster, Colorado November 3, 2009. Portal/Rick Wilking/File Photo
LONDON, July 11 (Portal) – The dollar weakened to a two-month low on Tuesday after Federal Reserve officials signaled the central bank was nearing the end of its tightening cycle, while sterling hit a 15-month high after wage growth exceeded expectations.
Several Fed officials said on Monday that the central bank will likely need to raise interest rates further to bring inflation down, but the end of its current monetary tightening cycle is near.
Comments drove the greenback to a two-month low of 101.67 against a basket of currencies as traders scaled back expectations of how much US interest rates have yet to rise.
Interest rate expectations in the US have been a key driver for the dollar since the Fed’s tightening cycle began last year.
“Pressures on the USD are likely to increase as cyclical headwinds mount and markets begin to anticipate Fed policy easing,” said Shaun Osborne, chief foreign exchange strategist at Scotiabank.
Markets are now turning their attention to US consumer price data expected on Wednesday, which will provide more clarity on the Fed’s progress in fighting stubbornly high inflation.
A survey conducted by the New York Federal Reserve on Monday showed that Americans’ near-term inflation expectations are easing. Last month they said they expected the weakest near-term inflation gains in just over two years.
“The market could get another reason to sell USD in the form of inflation data,” said You-Na Park-Heger, FX analyst at Commerzbank, noting that headline and core inflation are likely to weaken.
Sterling, meanwhile, hit a near 15-month high of $1.2913 after UK wage growth hit a collective record high, increasing pressure on the Bank of England to further tighten monetary policy to keep inflation under control to bring control.
According to Kirstine Kundby-Nielsen, FX analyst at Danske Bank, the pound rallied on a stronger economy and an aggressive reassessment of expectations of tighter BoE policy.
“There was no sign of an easing in jobs data and markets continue to price in more. That was a huge factor driving the pound,” Kundby-Nielsen said.
The yen was among the biggest gainers, gaining about 0.6% to above 141 per dollar for the first time in almost a month. It was last traded at 140.455.
The yen is up more than 3% from a seven-month low hit last month when it weakened above the closely watched 145 per dollar level, putting traders on high alert for possible intervention by the Japanese authorities.
“(The yen) started to falter earlier, near 145, and that’s because there were concerns about FX intervention,” said Moh Siong Sim, currency strategist at the Bank of Singapore.
He said rising Japanese government bond yields contributed to the strengthening yen alongside a weaker dollar.
“The market is beginning to reawaken to the notion that there is political risk (of the Bank of Japan) ahead of the July meeting… With inflation rising in Japan, the market is becoming more cautious than maybe…” It could become a political change coming.
The euro rose 0.1% to $1.1012, the Australian dollar stabilized at $0.6680, while the New Zealand dollar fell 0.2% to $0.6198.
The offshore Chinese yuan edged higher, last trading at 7.2055 per dollar, with sentiment helped by an extension of China’s central bank’s fiscal support to the country’s troubled real estate sector.
Reporting by Samuel Indyk and Rae Wee; Edited by Shri Navaratnam, Edmund Klamann and Alex Richardson
Our standards: The Trust Principles.