The dollar lost ground amid strong demand for risk assets.

Risk appetite held firm during Wednesday with further gains for equities and risk-related trades. US bond yields overall were little changed despite further underlying inflation concerns. Global equities made headway, but there was a more cautious tone on Thursday with a net retreat in Asia.

The dollar lost ground amid strong demand for risk assets but did recover from fresh 3-week lows as conditions turned more cautious. EUR/USD was little changed overall, but the Euro was vulnerable on the crosses. The yen gained some respite on the crosses with USD/JPY retreating from 47-month highs.

Sterling recovered from losses posted after the UK CPI data with favourable risk conditions complementing yield support and GBP/USD above 1.3800. Commodity currencies continued to post net gains amid robust risk conditions with AUD/USD at 15-week highs before a correction on Thursday. USD/CAD also recovered from 16-week lows below 1.2300. Oil prices were boosted by a strong inventory report as WTI touched fresh 7-year highs before a correction.

Euro-zone CPI inflation was confirmed at 3.4% for September from 3.0% previously with the core rate at 1.9%. There was little impact on the Euro with markets assuming that the ECB would maintain an accommodative policy stance which would also limit potential single currency support.

The Euro was hampered slightly by Bundesbank head Weidmann’s comments that he would leave the bank at the end of this year.

The dollar was unable to make headway ahead of the New York open with the currency hampered by further strong demand for commodity currencies amid robust risk conditions. There were also expectations that other global central banks would tighten policy which would limit the dollar’s relative appeal. There was little change in trend after the New York open with the dollar overall remaining on the defensive. In this environment, EUR/USD traded close to 1.1650 at the European close.

Fed Governor Quarles stated that it’s clear the tests for tapering asset purchases had been met and supported a decision at the November policy meeting to start reducing bond purchases. He also stated that his focus was turning towards inflation and away from the labour market. There were underlying concerns over inflation expectations with one measure hitting an 8-year high. Cleveland Fed President Mester also stated that her inflation forecasts had been revised higher.

The dollar was unable to secure any significant support from the release, but commodity currencies were subjected to a correction on Thursday which limited the potential for further dollar selling despite fragile sentiment. EUR/USD held close to 1.1650 in early Europe after failing to register a fresh 3-week high.

Long-term Treasuries edged lower after the New York open with the 10-year yield slightly higher, but there was a small decline in the 5-year yield. Overall risk appetite held firm which limited the scope for yen demand, but the currency was able to resist further selling amid concerns that short yen positions were over-extended against the dollar and on the crosses. In this environment, USD/JPY retreated to the 114.20 area at the European close.

The Federal Reserve Beige Book of economic conditions noted that a majority saw modest to moderate growth and the near-term outlook for activity remained encouraging. Most districts reported significantly elevated prices with strong demand for goods and supply-chain difficulties. The inflation outlook was mixed, but many firms reported a greater ability to raise selling prices and pass-on increased costs. There was also strong upward pressure on wages within the economy.

The Chinese Evergrande situation will be watched closely with the company needing to pay coupons on dollar bonds by Monday to avoid an official default.

Asian equities were mixed while risk conditions were slightly more cautious which limited the potential for further yen selling, especially with Japan uneasy over the impact on import prices. In this environment, USD/JPY retreated to near 114.00 with EUR/JPY just below 133.0 as the yen secured some respite on the crosses.

Sterling lost ground after the latest UK inflation data with a slight cooling of expectations that the central bank would decide on an early increase in interest rates. GBP/USD dipped to lows below 1.3750 and GBP/EUR rallied to 1.1860 as investors also looked to take profits after a strong Sterling advance.

Overall risk appetite held firm which limited the potential for underlying selling and there was fresh currency demand after the New York open. With inflation certain to rise again next month, a Bank of England rate hike was likely to remain a live issue for the November policy meeting.

Markets were monitoring Brexit developments with the potential for France to announce sanctions on the UK this week. There were also reservations over domestic coronavirus trends and risk appetite was slightly less optimistic.

Sterling, however, maintained a firm tone and GBP/USD held above 1.3800 in early Europe with GBP/EUR around 1.1860. The latest UK business and consumer confidence data together with retail sales will be watched closely on Friday.

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