The dollar edged lower against a basket of currencies on Tuesday, as investors awaited speeches by Federal Reserve officials for signs on whether the central bank will stick to its guns and raise rates this year. Fed officials have signalled they will look through a slowdown in inflation and continue on their current trajectory of interest rate hikes – though investors are sceptical and market pricing shows only a 40 percent chance of a rise at the Fed’s December meeting. Fed Chair Janet Yellen addresses the British Academy in London at 1700 GMT, less than two hours after an address by Philadelphia Fed President Patrick Harker in the same city at 1515 GMT. The dollar index was last down 0.3 percent at 97.180.
The greenback was also 0.3 percent lower against the Japanese currency at 111.475 yen, having earlier risen to a near 5-week high of 112.075 in Asian trading. “A notion increasingly shared in the market … is that the Fed is continuing to normalize monetary policy regardless of more muted inflation developments – this is the message which has been provided during the last week by several Fed speakers,” said Manuel Oliveri, currency strategist with Credit Agricole in London. “This suggests that the market-based rate expectations have additional room of adjusting to the upside should this notion become even a bigger one.”
San Francisco Fed President John Williams said on Monday that a slowdown in U.S. inflation was mainly due to one-off factors and should not prevent further increases in interest rates. Financial conditions have loosened in the past year despite the Fed raising interest rates three times since December, which is another reason to continue tightening, New York Fed President William Dudley said in remarks published on Monday. A positive view from Yellen despite a recent batch of weak U.S. economic data would support the Fed’s forecast for another rise in policy rates this year.
U.S. data on Monday gave investors reason to be cautious about buying the dollar. New orders for key U.S.-made capital goods unexpectedly fell in May and shipments also declined, suggesting a loss of momentum in the manufacturing sector halfway through the second quarter. The euro was up 0.1 percent to $1.1190, moving up from its overnight low of $1.1172 reached after dovish comments from European Central Bank President Mario Draghi, contrasting sharply with the tone of Fed officials.
Draghi said on Monday that super low interest rates create jobs, foster growth and benefit borrowers. He rejected calls to exit super easy monetary policy quickly, arguing premature tightening would lead to a fresh recession and more inequality.
Sterling was flat at $1.2726 ahead of the release of the Bank of England’s Financial Stability Report and a speech by BoE governor Mark Carney. The pound see-sawed last week after Carney and the Bank’s chief economist Andy Haldane gave opposing commentary on their stance towards raising record low UK interest rates, compounding a split at the Bank’s rate-setting committee.
“Our economists expect the emergency measures (designed to boost the access to credit in the wake of the surprise Brexit vote last year) to be at least partially reversed,” ING currency strategist Petr Krpata wrote in a note to clients.
“However, these macro prudential measures are unlikely to have an imminent impact, yet should be viewed as a healthy course of action given the surging consumer credit over the last twelve months. Expect largely limited impact on sterling, with euro-sterling to continue hovering around the 88 pence level.”