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Dollar in doldrums as traders ponder Fed policy path; sterling soars

Pound and U.S. dollar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

The dollar languished near multi-month lows versus major peers on Tuesday, as traders pondered the prospects for early policy normalisation by the Federal Reserve ahead of a key jobs report at the end of the week.

The British pound rallied to a three-year peak at $1.425, while Canada’s loonie hovered near a six-year top, amid market expectations for policy tightening in those countries.

Australia’s dollar rose for a second day to as high as $0.77605, ahead of a central bank announcement at 0430 GMT, although economists predict no change to monetary policy.

The offshore Chinese yuan edged back toward Monday’s three-year high of 6.3526 per dollar, last trading at 6.3640, paring a retreat spurred by the monetary authority’s tightening of banks’ FX requirements to stem the currency’s rise.

The dollar index , which tracks the greenback against six peers, was back below 90 from as high as 90.447 on Friday, when a measure of U.S. inflation closely watched by the Fed posted its biggest annual rise since 1992. The gauge sank 0.3% on Monday, in a market thinned by U.S. and British holidays.

Fed officials, led by Chair Jerome Powell, have said repeatedly they expect price pressures to be transitory and monetary stimulus to stay in place for some time, but investors are wary that a strong pandemic recovery could force the Fed’s hand.

Vice Chair Randal Quarles and Governor Lael Brainard will both be speaking at separate events on Tuesday, while nonfarm payrolls numbers on Friday will be even more closely scrutinized than usual after the much-weaker-than-expected reading a month ago.

Commonwealth Bank of Australia strategist Joseph Capurso says that trimmed measures of inflation, which eliminate the most extreme price changes, show the U.S. has no inflation problem, and markets will need to unwind some of the expectation for near-term policy tightening, which will weigh on the dollar.

The global pandemic recovery will provide an additional headwind, he said.

“The world economy is clearly recovering, and that is going to be bad for the U.S. dollar because it’s a counter-cyclical currency,” Capurso said. “The U.S. dollar has been pretty heavy in the last few weeks, and I think it keeps trending lower.”

That includes a drop to $1.24 per euro by the end of this month, extending to $1.32 by the middle of next year.

The euro gained 0.1% to $1.22325 on Tuesday, not far from a nearly five-month high of $1.2266 touched last week.

The dollar fell for a second day against the yen , weakening 0.2% to 109.375. The pair had climbed as high as 110.20 on Friday, following the inflation data.

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Currency bid prices at 139 GMT

Description	RIC	Last	U.S. Close Previous Session	Pct Change	YTD Pct Change	High Bid	Low Bid
Euro/Dollar		$1.2233	$1.2225	+0.07%	+0.13%	+1.2236	+1.2224
Dollar/Yen		109.3450	109.4600	-0.02%	+5.95%	+109.5520	+109.4400
Euro/Yen		133.76	133.95	-0.14%	+5.39%	+134.0000	+133.7500
Dollar/Swiss		0.8983	0.8987	-0.04%	+1.54%	+0.8987	+0.8981
Sterling/Dollar		1.4243	1.4215	+0.20%	+4.25%	+1.4248	+1.4209
Dollar/Canadian		1.2048	1.2071	-0.19%	-5.38%	+1.2065	+1.2047
Aussie/Dollar		0.7761	0.7728	+0.45%	+0.92%	+0.7762	+0.7736
NZ Dollar/Dollar		0.7282	0.7275	+0.12%	+1.43%	+0.7283	+0.7270