Dollar Consolidates After Strong Gains; Tapering Could Be Speeded Up

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By Peter Nurse

AiVIF.com - The dollar edged lower Thursday, consolidating after hitting 16-month highs after the minutes from the last Federal Reserve meeting pointed to the potential of a faster tapering pace.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 96.733, just below Wednesday's high of 96.938, the strongest level since July 2020.

USD/JPY fell 0.1% to 115.35, not far removed from the overnight high of 115.53, a level not seen since January 2017. GBP/USD edged 0.2% higher to 1.33485, EUR/USD rose 0.2% to 1.1218 after falling below 1.12 on Wednesday  and AUD/USD rose 0.1% to 0.7204.

The minutes from the Fed’s meeting held in early November, when the central bank agreed to start tapering, were released on Wednesday. These showed that a number of policymakers were open to the idea of speeding up the withdrawal of the bank’s bond-buying program if inflation remained at elevated levels. This would likely lead to the quicker introduction of higher interest rates. 

At the same time, data showed that personal income and personal spending both rose by more than forecast, while the PCE Price Index, widely seen as the Fed’s preferred gauge of inflation, rose at its fastest rate since April in October, and rose to multi-decade highs on an annual basis. 

San Francisco Fed President Mary Daly added to the reasons to be bullish about the dollar, saying on Wednesday that she could see a case being made to speed up asset tapering.

“We find increasing evidence of a new leg of inflationary pressures in the U.S., increasing our conviction of a hawkish shift from the Fed during 2022,” said analysts at Nordea, in a note.

There’s little in the way of news expected from the U.S. to influence the foreign exchange markets Thursday due to the Thanksgiving holiday, but the minutes from the European Central Bank's meeting at the end of October are due for release.

“Despite the fourth [Covid] wave in Europe, the ECB seems to be sticking to the view that the PEPP [pandemic emergency purchase program] scheme will end in March,” said analysts at ING, in a note.

Elsewhere, USD/TRY fell 0.3% to 12.0497, with the Turkish lira rebounding to an extent after falling to record lows earlier in the week on the back of President Tayyip Erdogan defending the central bank’s recent rate cuts. The pair climbed to a high of 13.45 on Tuesday. 

Additionally, USD/SEK fell 0.1% to 9.1039 ahead of a meeting by the Riksbank, with investors looking to see whether Sweden’s central bank still plans to keep its policy rate at zero into 2024. That comes after Sweden's Prime Minister was forced to resign after her coalition partner refused to approve her budget bill.

USD/HUF fell 0.1% to 328.67, with the National Bank of Hungary widely expected to hike its one-week deposit rate another 10 basis points to 2.60%.