Dollar nurses post-Fed losses as reflation trade gets green light

  • Reuters
  • Forex News
Dollar nurses post-Fed losses as reflation trade gets green light
Credit: © Reuters.

* Fed's Powell quashes tapering talk, Biden touts spending

* Euro breaks to nine-week peak, CAD to 3-year high

* U.S. GDP set to be strong, trade and budget deficits a drag

By Ritvik Carvalho

LONDON, April 29 (Reuters) - The dollar traded just off nine-week lows on Thursday as a doggedly dovish outlook from the U.S. Federal Reserve and bold spending plans from the White House gave a green light for the global reflation trade.

President Joe Biden's push for another $1.8 trillion in spending also risked expanding the U.S. budget and trade deficits, a perennial Achilles heel for the dollar. euro made the most of the opportunity to hit its highest since late February at $1.2150 EUR=EBS , before steadying at $1.2121.

Fed Chairman Jerome Powell did the dollar no favours by quashing speculation about an early tapering of asset buying, saying employment was still far short of target. front-end U.S. real rates already deeply negative and set to fall further as U.S. CPI rises sharply this quarter, this is likely to be a dollar negative, particularly when other parts of the world (namely Europe) are set to see an economic rebound in coming months," said Petr Krpata, chief EMEA FX and IR strategist at ING.

Even the outperformance of the U.S. economy had a sting in the tail for the dollar as it sucked in imports and drove the trade deficit to record highs in March. could also temper any reaction to an upbeat U.S. GDP report for the first quarter due later on Thursday, where market forecasts are for annualised growth of a whopping 6.1%.

The closely-watched Atlanta Fed's "GDP Now" estimate is that GDP expanded by 7.9%, suggesting considerable upside risk.

The Fed's dovishness was in marked contrast to the Bank of Canada which has already begun to taper its asset buying, sending the dollar sliding to a three-year trough against the loonie at C$1.2283 CAD= .

Another notable break lower came against the Norwegian crown, where the dollar hit its lowest since October 2018 at 8.1460 crowns NOK= .

"Under these circumstances, cyclical FX should benefit. It is no surprise that Norway's krone and Canada's dollar have been the best performing G10 currencies over the past two days, as apart from their high betas, they also stand out with more policy normalisation-prone central banks," Krpata said.

The crown has been buoyed by rising oil prices as the global economic recovery boosts demand for commodities, a trend that is also benefiting the Australian AUD=D3 and New Zealand dollars NZD=D3 .

The dollar also shed much of the week's gain against the yen, falling back to 108.55 JPY= from Wednesday's top of 109.07. A holiday in Japan kept it contained in Asian hours, although the dollar reclaimed some ground and rose to 108.80 yen in early London deals.

Against a basket of currencies, the dollar clambered off a nine-week low at 90.645 =USD , and a long way from the rally peak of 93.439 hit at the end of March.

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