FOREX-Dollar on front foot as risk appetite recovers; Fed focus turns focus

SINGAPORE Reuters -- The U.S. dollar was on the front foot on Thursday as receding concerns over the banking sector helped improve risk sentiment, with investors switching their attention to the Federal Reserve'sFederal Reserve's fight against inflation.

The dollar index, which measures the currency against six major peers, gained 0.097% at 102.73, after gaining 0.19% overnight. The index fell by 2% for March due to market turmoil caused by problems in the banking industry.

Christopher Wong, a currency strategist at OCBC in Singapore, said that the broader risk sentiment appears to be sustained as bank contagion concerns faded and a rally in China equities grabbed some attention.

Risk sentiment held up this week, but we expect month-end flows alongside risk-off flows to drive two-way trade. Banking stocks have been battered in the past few weeks after the collapse of two U.S. lenders and the rescue of Credit Suisse, with the dollar under pressure due to fears that the Fed may have to relent in its fight against inflation and pause rate hikes.

Investors' nerves have calmed down after there were no more signs of cracks in the financial sector and steps taken by regulators. Focus has switched back to what the Fed is likely to do at its next meeting in May.

According to CME FedWatch, markets are pricing in a 60% chance of the Fed standing pat on interest rates.

With the recession fears fading off, the market s focus is now on the U.S. PCE data later this week, which is seen as the Fed's favourite inflation parameter, said Tina Teng, a market analyst for CMC Markets.

Caution still needs to be kept in mind as the Fed may not be as market-friendly as thought if inflation does not pave the way. The euro was down by 0.13% to $1.0829, but was on track to end the month with a 2% gain. After slipping 0.2% on Wednesday, the pound was last at $1.2297, down 0.11%.

The Japanese yen was up by 0.05% to 132.77 per dollar after falling 1.5% overnight. The currency has been volatile in the run up to the end of the Japanese fiscal year on Friday.

The Australian dollar fell 0.21% to $0.667, while the kiwi fell 0.22% to $0.621.