The dollar was near a three-month low and was on track for a weekly loss on Friday as the prospect of a slowdown in the Federal Reserve’s monetary tightening in December dominated investors’ minds and kept spirits upbeat.
Overnight trading was weak due to the Thanksgiving holiday in the United States, although most currencies extended their gains against a softer dollar before paring slightly in early trade in Asia.
Sterling rose more than 0.5% overnight to last trade at $1.21125, close to its more than three-month high of $1.2153 hit in the previous session and on track to gain nearly 2 % per week.
Overnight, the Japanese yen jumped about 0.7% and was last traded at 138.60 per dollar.
Minutes of the Fed’s November meeting, released earlier this week, showed that a “substantial majority” of policymakers agreed that it would “probably be appropriate” to slow the pace of interest rate hikes – remarks that boosted the dollar.
Aggressive interest rate hikes by the Fed and market expectations about how high the central bank might take them have been a huge factor in the dollar’s 10% rise this year.
“We still have a positive risk sentiment for the third day in a row … I think that keeps the US dollar bearish across the board,” said Ray Attrill, head of currency strategy at National Australia Bank.
Against a basket of currencies, the US dollar index was at 105.94, testing a three-month low of 105.30 hit last week.
It headed for a weekly loss of nearly 1%. Risk sentiment was also slightly boosted by a survey that showed German business sentiment rose more than expected in November.
European Central Bank (ECB) policymakers fear inflation may be taking hold in the euro zone, reports from its October overnight meeting showed.
However, markets now expect a more modest move at the December meeting by 50 bps.
The euro fell 0.06% to $1.04045, but remained close to $1.0481, the highest level in more than four months reached last week.
“Next week we’ll get the Eurozone inflation numbers, so I think they will be a major test of market pricing … if we were to get another surprise, I think 75bps. would be back on the agenda,” Atril said.
The Aussie fell 0.17% to $0.6753 after gaining more than 0.4% overnight.
The kiwi fell 0.19% to $0.6252, but that was not far from its three-month peak reached in the previous session.
The New Zealand dollar was on course to gain more than 1.5% weekly, helped by the Reserve Bank of New Zealand’s 75bp rate hike.
In China, markets were also closely watching the upcoming cut in banks’ required reserve ratio (RRR).
State media quoted a cabinet meeting as saying that China would use a timely cut in banks’ RRR, along with other monetary policy tools, to maintain sufficient liquidity.
“We believe the PBoC (People’s Bank of China) can cut the RRR by 25 bps. for most banks in the next couple of weeks (or even days),” Nomura analysts said.
“That said, the RRR is likely to have only a limited positive impact as we believe the real impediment to the economy lies in stronger enforcement of Covid restrictions by local authorities, rather than insufficient credit.”
China’s offshore yuan was last 0.1% lower at 7.1759 per dollar.
