Dollar underpinned in Asia as Fed clips doves' wings

© Reuters. FILE PHOTO: Illustration photo of a U.S. five dollar note

By Wayne Cole

SYDNEY (Reuters) – The dollar took a breather in Asia on Thursday after recovering from a brief spill overnight when markets were whipsawed by mixed messages on policy from the Federal Reserve.

Liquidity was lacking with both Japan and China on holiday and little in the way of major economic data in the diary. The break was welcome after a volatile session overnight.

The dollar had taken an initial knock from a surprisingly sharp retreat in the ISM index of manufacturing to 52.8, which overshadowed a strong ADP (NASDAQ:) report on hiring.

It fell further when the Fed downgraded its inflation outlook and made a technical cut to rates on excess reserves.

All that changed when Fed Chair Jerome Powell said the factors dragging on inflation might be “transitory” and he saw no case for a rate move in either direction.

The net result was a rebound in a against a basket of currencies to 97.616, having earlier traded as low as 97.149.

The euro was back at $1.1200, after reaching as high as $1.1265, and the dollar steadied at 111.44 yen from a low of 111.03.

Bonds likewise see-sawed with the two-year yield first diving to a one-month trough of 2.206 percent, only to end the Wednesday session 4 basis points higher at 2.308 percent.

As the dust settled, the market had scaled back just a little of its wagers for Fed rate cuts this year.

“Our view remains that the Fed has completed its policy normalization process and we should expect an extended period of rates on hold,” said Joseph Capurso, senior currency strategist at CBA. “But the risk to our forecasts have changed.”

“If the FOMC is to change the Funds rate over the next few years, it is likely to be a cut,” he said, citing slowing inflation, record-low inflation expectations and flat wages.

The next major test for the dollar will be U.S. payrolls on Friday where any surprise has the power to shift Fed rate expectations all over again.

Sterling was one of the few currencies to buck the dollar, touching a two-week high on Wednesday on speculation Brexit talks between the British government and the main opposition party were making some progress. [GBP/]

The pound was last at $1.3054 in Asia, having been as high as $1.3101 overnight.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.