The US dollar pared losses on Friday after US Federal Reserve Chairman Jerome Powell said the US central bank should begin reducing its asset purchases soon, but should not yet raise interest rates.
Powell said employment is still too low and high inflation would likely abate next year as pressures from the COVID-19 pandemic fade, even as many market participants are concerned that rising price pressures would last longer than policymakers believe.
Investors have taken profits since the US dollar index hit a one-year high last week, when concerns that inflation would remain stubbornly high for longer led investors to bring forward expectations on when the Fed would first raise rates to the middle of next year.
Now, “there’s a bit of a positioning unwind taking place, we’ve obviously seen a firmer dollar since the September Fed,” said Mazen Issa, senior foreign exchange strategist at TD Securities in New York. “That also dovetails with the seasonal tendency for the dollar to soften into the end of the month.”
The Fed said at its meeting last month that it will likely begin reducing its monthly bond purchases as soon as next month, and signaled that interest rate increases might follow more quickly than expected.
The US dollar index on Friday fell 0.2 percent to 93.61, and is down from a one-year high of 94.56 last week. The index is down 0.4 percent for the week.
In Taipei, the New Taiwan dollar rose against the greenback on Friday, gaining NT$0.010 to close at NT$27.902, up 0.4 percent for the week.
The euro on Friday gained 0.09 percent against the US dollar to US$1.1636.
Data on Friday showed that US business activity increased solidly this month, suggesting that economic growth picked up at the start of the fourth quarter as COVID-19 infections subsided, although labor and raw material shortages held back manufacturing.
The US dollar rally has also faded as investors build in expectations for sooner rate increases in other currencies.
However, Issa expects the US dollar to regain traction as global central banks push back against the aggressive repricing of rate hikes, while the Fed is likely to remain relatively hawkish and move forward with a reduction in its bond purchase program.
“Once we get the pushback from other central banks and the Fed’s committed to taper, we should see dollar dips really being shallow,” Issa said.
The Australian dollar, which is a proxy for risk appetite, gave up earlier gains and was down 0.05 percent at US$0.7462.
The safe-haven yen gained, although it remains the weakest performer, having dropped by almost 10 percent this year. The US dollar was down 0.5 percent against the Japanese currency at ¥113.42.
Additional reporting by CNA, with staff writer
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