Attempted US dollar rallies faded in New York trading as strong risk appetite undermined demand.

Dovish rhetoric from Fed Chair Powell and other Fed officials were crucial in underpinning risk conditions on Wednesday. Markets continued to monitor US and global bond yields.

After a weak start, Wall Street equities posted significant gains with the S&P 500 index close to record highs. Global equity markets also net posted gains on liquidity hopes.

Attempted US dollar rallies faded in New York trading as strong risk appetite undermined demand. EUR/USD found support above 1.2100 and strengthened to 1.2180. Sterling corrected from sharp overnight gains, but found strong support on dips. Commodity currencies reversed corrective losses to post 3-year highs against the US currency.

French business confidence edged higher to 97 for February from a downwardly-revised 96 the previous month, but was below consensus forecasts, maintaining reservations over the outlook. The Euro gained ground at the New York open, but was unable to sustain the advance and EUR/USD weakened sharply from 1.2170 highs.

There was some evidence of month-end dollar demand which helped protect the US currency ahead of the New York open, although gains were limited.

The prepared testimony from Fed Chair Powell in his second appearance before Congress was the same as the previous day. Powell reiterated that there would be no early removal of stimulus measures. He insisted that the current pace of bond buying would continue until actual data moves closer to inflation and employment goals. He also noted that there is a lot of slack in the labour market and a long way to go to reach maximum employment.

As far as inflation is concerned, Powell stated that the Fed wanted to see inflation expectations anchored at 2% not below.

Fed Governor Brainard stated that shortfalls from maximum employment are the key policy guide and that current real jobless rate is currently closer to 10%. Brainard also noted that inflation remains very low, although there may be transitory price pressures. Vice Chair Clarida stated that he did not expect sustained upward pressure on inflation. The overall dovish tone sapped dollar support and there was also a fresh advance for commodity currencies.

In this environment, the Euro gradually regained ground to settle just below 1.2150. The US currency remained firmly on the defensive on Thursday as global reflation trades continued to dominate markets. The dollar retreated to near 3-year lows with commodity currencies strong and EUR/USD strengthened to near 1.2180.

The dollar moved steadily higher into the New York open with support from higher US bond yields. The yen was also undermined by a wider lack of support for defensive assets. In this environment, USD/JPY strengthened to highs above 106.00.

US new home sales increased to an annual rate of 923,000 from an upwardly-revised 885,000 previously, maintaining strong data from the housing sector.

US yields moved lower following Powell’s congressional testimony and the US currency moved lower, although gains in equity markets continued to curb wider support for the yen. The Japanese currency lost ground on the main crosses as risk appetite strengthened.

Yields held a firm tone on Thursday with the 10-year yield just above the 1.40% level which provided an element of dollar support as markets also monitored the US fiscal package developments. The yen lost ground on the crosses and USD/JPY settled just below 106.00 in early Europe with EUR/JPY near 129.0.

After spiking higher in Asia on Wednesday, Sterling remained vulnerable to a correction in European trading on Wednesday. As the correction continued and the dollar secured some relief, GBP/USD dipped to just below 1.4100.

Bank of England Deputy Governor Broadbent stated that risk for employment were in both directions, but that there was a clear risk that the rate will rise significantly once job-support schemes come to an end. He reiterated that the bank debate surrounding negative interest rates was whether they would be effective.

MPC member Haskel stated that risks to activity are very much on the downside, especially in relation to the February forecasts. The comments from Haskel overall were notably dovish, especially with concerns over debt and insolvency risks. Governor Bailey steered away from significant comments on monetary policy.

Overall reaction was muted, but Sterling remained in a corrective mode as GBP/EUR edged above 1.1690. There were further reports that the UK Chancellor will release stimulus measures in next week’s budget in order to boost an economic recovery. Sterling also gained support from the wider strength in global risk appetite.

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