Dollar bets on Fed, Biden to cement rebound from Reuters 8-week low

© Reuters. FILE PHOTO: A US dollar note can be seen in front of a stock graph in this illustration

From Hideyuki Sano

TOKYO (Reuters) – The dollar will take its cue from the Federal Reserve’s policy statement and President Joe Biden’s speech on Wednesday as it seeks to extend the recovery from an eight-week low earlier this week versus a basket of Currencies.

The level stood at 90.968, rebounding from Monday’s low of 90.679, its lowest level since March 3, although investors are not convinced that the downtrend has ended since late March.

The decline in the greenback was largely due to falling bets that the Federal Reserve could soon lay the groundwork for future policy tightening.

The Federal Reserve is widely expected to maintain its political stance on Wednesday, and Fed chair Jerome Powell is likely to reiterate his cautious message.

However, some analysts say signs of rising inflation expectations could lead the Fed to abandon its rhetoric that tightening policy is still a long way off.

Investors’ inflation expectations, measured by the break-even inflation rate (BEI) calculated from inflation-linked US bonds, rose above 2.40% on Tuesday, the highest level since 2013.

“In a way, the BEI above 2% rise is what the Fed wanted. However, if it goes too far it could raise the Fed’s alarm. The Fed is unlikely to be able to increase the BEI to be overlooked. ” over 2.5%, “said Makoto Noji, chief FX strategist at SMBC Nikko Securities.

The Federal Reserve said last year it was targeting an average inflation rate of around 2% and allowing it to overshoot above 2% instead of trying to limit it to 2%.

The euro was trading at $ 1.2089, up from a two-month high of $ 1.2117 on Monday.

The dollar was at 108.89 yen after rising 0.59% overnight and extending its rebound from a seven-week low of 107.48 hit last week.

The dollar / yen pair rose in line with the rise in US bond yields due to US inflation expectations.

The yen was also lagging behind as Japan’s economic recovery was hampered by recent spikes in COVID-19 cases and after the Bank of Japan acknowledged that inflation will not hit its key 2% target by early 2023.

Japan declared a third state of emergency for Tokyo, Osaka and two other prefectures last week to contain the pandemic, bleak prospects for a fragile recovery and the outlook for the yen.

The Japanese currency even slipped against European currencies with lower yields, hitting a 2-1 / 2-year low against the euro of 131.515 per euro and a five-year low against the Swiss franc of 119.20 per franc.

In addition to the Fed, investors expect the first address by US President Joe Biden at a joint congressional session, which is also to take place later on Wednesday.

Biden is expected to come up with a plan to increase taxes on the richest Americans, including the largest hike on investment income taxes yet, to fund approximately $ 1 trillion on childcare.

News reports of his tax hike plan only briefly hurt the markets’ risk appetite on Friday, but analysts believe there could be a bigger reaction if the plan becomes more specific.

“In addition to tax policy that has re-emerged as a market focus, his stance on diplomacy should attract some attention given recent tensions with China and Russia,” said Shinichiro Kadota, senior strategist at Barclays (LON :).

In crypto assets, Bitcoin extended its rally from a low on Sunday to $ 55,461.

Ether hit a record high of $ 2,711.6 in Asia on Wednesday.

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