Dollar falls to lowest level in nearly two years as euro holds firm

Dollar falls to lowest level in nearly two years as euro holds firm

HONG KONG: The dollar index was heading for its worst week in nearly two years on Friday, as the euro held firm at a three-week high and sterling gained after hawkish moves from the European Central Bank and the Bank of England.

The index, which measures the dollar against six major peers, has fallen 2 per cent this week, its biggest drop since March 2020, and is currently at a three-week low of 95.271.

It follows sharp gains for the dollar last week as traders rejigged positions preparing for faster Federal Reserve hikes than had been anticipated, with about five hikes this year now being factored in.

On the face of it, both the Bank of England and the ECB met market expectations, with BoE raising rates 25 bps to 0.50 per cent and the ECB keeping policy unchanged. Both meetings unveiled substantial hawkish shifts, said Westpac analysts in a note.

The euro was at US $1.1452, its highest since Jan 14, after ECB president Christine Lagarde acknowledged mounting inflation risks and declined to repeat previous guidance that an interest rate increase this year was extremely unlikely.

This was a turnaround for what had been one of the world's most dovish central banks.

It is not unreasonable to conclude that the peak of the Fed-ECB policy divergence is past us, said ING analysts, since the different policy stances of the two central banks have been driving market moves, it is possible that last week's low for the euro marked its lowest in this cycle.

The pound was at US $1.3604 after climbing to a two-week high of US $1.6326 on Thursday. Nearly half of the policymakers wanted to contain rampant inflation, in addition to the BoE's 25 basis points rate hike.

The Reserve Bank of Australia changed its outlook for inflation, but said it was content with policy loose as it seeks a long-term recovery in wages and living standards, but the Aussie dollar was at US $0.7143, unaffected by a statement from the Reserve Bank of Australia.

The yield on Japanese government bonds climbed to six-year highs in early Tokyo trading, with analysts starting to speculate that even the Bank of Japan might have to follow peers and tighten monetary policy, as the yen was at 114.98 per dollar.

The Fed's focus is more on inflation rather than full employment, as the non-farm payroll data is due later on Friday, but the data won't be as important as in the past.