Dollar declines as Fed officials fade inflation fears

The U.S. dollar coasted at the bottom of its recent range on Tuesday, as softer-than-anticipated U.S. data and new insistence from Federal Reserve officials that policy would stay on hold eased investor fears about inflation forcing interest rates higher.

Investors are heavily short dollars believing that low U.S. rates will drive cash abroad as the world rebounds from the COVID-19 pandemic. They have become uncertain of adding to positions after an April leap in inflation cast doubt on the policy outlook. However, they seemed to find reassurance in data and Federal Reserve remarks overnight.

Meanwhile, Early Asia trade was steady. The U.S. dollar index was nursing a 0.2% overnight loss at 89.853 – above a four-month low. The euro increased by 0.3%, trading at $1.2213, which is close to testing resistance of about $1.2245.

According to Rodrigo Catril, a senior FX strategist at National Australia Bank in Sydney, markets seem to be coming around to the Fed narrative that a burst in inflation is only expected to be short-lived. Catril added that a temporary spike in prices should not instigate a removal of stimulatory policies from central banks.

There is no time to change the parameters of monetary policy

According to the Federal Reserve Bank of St. Louis President James Bullard, there is no time to change the parameters of monetary policy while we are still in the pandemic.

The yield on benchmark 10-year Treasuries dropped 2.4 basis points to a two-week low of 1.608%. Meanwhile, the American currency also eased on the Australian and New Zealand dollars and the yen.

The yen was last traded at 108.79 per dollar while the risk-sensitive Australian dollar and New Zealand dollar drifted round the middle of ranges that have held them since April. The Aussie stood at $0.7750, and the kiwi was at $0.7211.

The British pound, which has run up around 1.2% over the past three weeks while other majors have steadied, was stalled at $1.4160.

Cryptocurrency markets were steady in Asia after declining last week. Bitcoin traded close to $38,000 on Tuesday.

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