Dollar holds its gains as Fed set for lengthy inflation fight

© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

By Alun John

HONG KONG (Reuters) - The dollar touched a three-week high on Thursday after minutes from the Federal Reserve's July meeting pointed to U.S. interest rates staying higher for longer to bring down inflation.

The stronger greenback caused the pound briefly to dip below $1.2 in early European trading, its lowest in three weeks, the euro to drop to as low as $1.0146 and the Japanese yen to drift down to 135.45 per dollar.

This pushed the dollar index as high as 106.96, its highest since late July.

In the course of morning trading, however, the euro, sterling and yen all pared their losses, recovering to trade flat on the day, leaving the dollar index at 106.65.

Thomas Poullaouec, head of multi-asset solutions APAC at T. Rowe Price, said he expected the dollar would "keep on smiling".

"The 'dollar smile' theory holds that the currency does well at each end of the global growth continuum, benefiting when relative U.S. growth and rates are higher as well as from being a 'safe haven' when global growth is declining - both of which are happening," he said in emailed comments.

"At this point, it appears the only thing that could slow the dollar is a pivot by the Fed, which would likely only come amid signs of much weaker growth in the U.S. or stronger evidence of receding inflation. For now it looks like the dollar will keep on smiling."

Fed officials saw "little evidence" late last month that U.S. inflationary pressures were easing, minutes released on Wednesday showed.

They flagged an eventual slowdown in the pace of hikes, but not a switch to cuts in 2023 that traders until recently had priced in to interest-rate futures.

Traders see about a 40% chance of a third consecutive 75 basis point Fed rate hike in September, and expect rates to hit a peak around 3.7% by March, and to hover around there until later in 2023.

In Asian trade, the greenback gained most against the Antipodeans, especially the Aussie, which was dragged down as weaker-than-expected wage growth weighed on Australia's rates outlook.

The Australian dollar fell to a one-week low of $0.6899, following labour data that showed falls in both employment and the jobless rate, before bouncing back to $0.6951, up a fraction.

China's yuan, meanwhile, continued to struggle as weak consumption, low confidence, anaemic credit growth, a property crisis and restrictive COVID-19 policies have cast a long shadow over prospects for the world's second-largest economy.

The yuan fell nearly 0.2% to 6.788 per dollar, and also dropped below its 200-day moving average against the euro.. [CNY/]

========================================================

Currency bid prices at 1137 GMT

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

Previous Change

Session

Euro/Dollar

$1.0188 $1.0178 +0.09% -10.39% +1.0193 +1.0146

Dollar/Yen

134.9050 134.9950 -0.02% +17.35% +135.4200 +134.8000

Euro/Yen

137.43 137.47 -0.03% +5.46% +137.6500 +137.1600

Dollar/Swiss

0.9516 0.9519 +0.03% +4.38% +0.9544 +0.9501

Sterling/Dollar

1.2068 1.2050 +0.14% -10.77% +1.2079 +1.1995

Dollar/Canadian

1.2888 1.2915 -0.19% +1.96% +1.2946 +1.2882

Aussie/Dollar

0.6960 0.6937 +0.33% -4.25% +0.6970 +0.6899

NZ

Dollar/Dollar 0.6299 0.6281 +0.25% -8.00% +0.6299 +0.6248

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ