Dollar holds gains after Fed comments, sterling ticks up after BoE

By Ritvik Carvalho and Wayne Cole

LONDON (Reuters) - The dollar held gains against a basket of currencies on Thursday after hawkish comments from the U.S. Federal Reserve led markets to move forward the likely timing of a policy tightening.

Sterling ticked slightly higher after the Bank of England kept the size of its bond-buying programme unchanged and held its benchmark interest rate at a historic low of 0.1%.

The Bank said notably that it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting proceeds and that it would consider actively selling down holdings when the rate reaches at least 1%.

“While markets took the news of the 7-1 split as dovish initially, the undertones of today’s policy statement and monetary policy report (MPR) are much more hawkish than initially expected," said Simon Harvey, senior FX analyst at Monex Europe.

The euro ticked higher 0.15% to $1.1854, having recoiled from a top of $1.1899 overnight. The dollar also reached 109.75 yen, although the yen began to recover some lost ground.

On Wednesday, Fed Vice Chair Richard Clarida said conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023.

He and three other Fed members also signalled a move to taper bond buying later this year or early next depending on the labour market over the next few months.

"Clarida’s comments are allowing the dollar to stay well supported into the payrolls numbers on Friday," said ING FX strategists Francesco Pesole and Chris Turner.

"For today, the dollar could merely find some stabilisation amid a fairly quiet U.S. calendar (focus will only be on jobless claims)."

MIXED DATA

Predicting the jobs report with any confidence remains tricky as the spread of the Delta variant and labour bottlenecks roil the market.

Thus, the median forecast for payrolls is 870,000 while the range of estimates stretches from 350,000 to 1.6 million.

Mixed data on Wednesday added to the uncertainty as a surprisingly weak ADP report on private hiring clashed with the strongest reading yet for U.S. services.

Clarida's comments led investors to price in slightly higher chances of a hike in late 2022/early 2023 and to a flattening of the Treasury yield curve as short-term yields rose.

Such a move would likely precede any tightening by the European Central Bank, which is battling to get inflation near its target.

The Reserve Bank of New Zealand (RBNZ) seems likely to hike rates at its next policy meeting on Aug. 18, making it the first in the developed world to move since the pandemic hit.

A super-strong jobs report on Wednesday added to the case for New Zealand tightening and sent the kiwi to a one-month peak of $0.7088 overnight, before steadying at $0.7041.

"NZ's economy has almost closed its output gap and will risk overheating if stimulus is not reduced," said Westpac's head of NZ strategy Imre Speizer. "Markets are fully pricing a 25 bps rate hike, and are flirting with some chance of 50 bps."

He recommended buying the kiwi on any pullback to $0.7005, for a target of $0.7300.