TOKYO Reuters - The dollar went off near the bottom of its recent range against major peers on Tuesday, knocked back by weak U.S. factory data overnight and on markets that predicted quicker normalisation of monetary policy in other countries.
The dollar index, which measures the greenback against six peers, weakened by 0.05% to 93.894 from Monday. She has oscillated for the past three weeks between 93.671 and the one-year high of 94.563 reached on Tuesday, last Wednesday.
Over the past week it has however been lower, with a first interest-rate increase already priced in as soon as March next month and an initial stimulus as early as October next year.
A recovery of risk sentiment has also weighed on the safe-haven US currency.
Elsewhere, Bank of England governor Andrew Bailey sent a fresh signal for early rate hikes by saying on Sunday that the central bank will have to step to counter rising inflation risks. On Monday, New Zealand made dots for faster policy normalisation with the highest consumer price inflation in over a decade based on data from Japan showing the fastest consumer price inflation in more than a decade.
The U.K. and New Zealand were leading a rise of short term bond yields globally, with rates in Europe and Australia rising comparatively more than those in the U.S. when the dollar was pressured by the dollar.
The sense that 'transitory' inflation will last longer than previously thought has been the main catalyst as the market re-calibrated rate hike expectations in most jurisdictions, westpac strategists wrote in a research note.
However, the U.S. is likely to be insulated by an energy market bottleneck that is casting an ongoing cloud over rebound prospects in Europe and China, which should lead yield spreads at the front end continuing to drift in USD's favour, they said, adding that pullbacks in the US Dollar index should be limited to 93.70.
However, Westpac remains bullish on the kiwi dollar - which isn't part of the dollar index - targeting a climb to $0.74 by year-end and recommending buying any dips to $0.6985.
The kiwi rose 0.11% to $0.7093, edging back toward a high of $0.7105 reached on Monday.
Aussie dollar gained 0.09% to $0.74225, reaching a more than one-month high of $0.7440 at the end of last week, even after minutes of Reserve Bank of Australia's September meeting on Tuesday showed that policymakers are concerned tighter policy could harm the labour market.
The euro advanced 0.09% to $1.16205, approaching the top of this month's trading range.
Against the safe-haven yen, the dollar moved gradually with 114.275 but not far from the almost three-year high of 114.47 touched on Friday.
U.S. manufacturing output was hurt as an ongoing shortage of semiconductors drove motor vehicle output, providing further evidence that supply constraints were hampering economic growth
The strong USD forecast published in early July reflected - among other things - U.S. economic performance, but the USD drivers may be changing, Commonwealth Bank of Australia strategist Joseph Capurso wrote in a client note.
The rise in global inflation and interest rates may support the USD as a safe haven if short term interest rates price in a global tightening cycle that it so strong forces equities to correct lower, with evidence of that scenario likely seen in a decline in USD JPY and AUD JPY, he said.