MercoPress. South Atlantic News Agency

Dollar skids as Fed officials testify that stimulus tightening is “still quite a way off”

Last week the Fed surprised markets by signaling much earlier rate hikes than investors previously expected.

With U.S. Federal Reserve officials including Chair Jerome Powell reaffirming that tighter monetary policy was still some way off, the US dollar slipped against major peers on Wednesday.

The dollar index, which measures the greenback versus six rivals, was at 91.775 in early Asian trading, off a two-month high of 92.408 reached at the end of last week.

It has now given up about a third of its sharp gains posted since last Wednesday, when the Fed surprised markets by signaling much earlier rate hikes than investors previously expected.

Overnight, both Powell and New York Fed President John Williams warned that the economic recovery requires more time before a tapering of stimulus and higher borrowing costs are appropriate.

“Latest smoke signals from the Fed ... all point to September as the meeting when the Fed is, on current trends, most likely to declare that substantial further progress towards their goals has been achieved, or is being achieved,” Ray Attrill, head of foreign-exchange strategy at National Australia Bank in Sydney, wrote in a client note, forecasting tapering likely won't start until early next year.

“Their comments have seen markets row back somewhat from their largely position-driven convulsions last week.”

The euro was little changed on Wednesday at US$1.19340, after rebounding from as low as US$1.18470 at the end of last week. The Aussie dollar, often viewed as a proxy for risk sentiment, was largely flat at US$0.7546, up from a recent low of US$0.7478.

The yen, which tends to move inversely to U.S. Treasury yields, was mostly unchanged at 110.740 per dollar, close to the 110.825 mark reached last week for the first time since April 1.

Benchmark 10-year Treasury yields edged lower in Asia to 1.4616per cent, from as high as 1.5940per cent a week ago.

“We will not raise interest rates preemptively because we fear the possible onset of inflation,” Powell said on Tuesday in a hearing before a U.S. House of Representatives panel. “We will wait for evidence of actual inflation or other imbalances.”

Williams said Fed officials will keep a close eye on economic data to determine when it will be appropriate to start adjusting monetary policy. “That's still quite a ways off.”

Producer price inflation data on Friday is the next major economic focus for the United States.