Dollar headed for weekly loss as investors brace for slower Fed hikes

SINGAPORE, Nov 25 (Reuters) – The dollar was near a three-month low and on track for weekly losses on Friday, as the prospect of the Federal Reserve slowing monetary policy dominated and remained on investors’ minds in December. lively mood

Trading was thin overnight due to the US Thanksgiving holiday, although most currencies extended gains against a softer greenback before paring somewhat in early Asian trade.

Sterling rose more than 0.5% overnight and last settled at $1.21125, close to a three-month high of $1.2153 in the previous session and on course for a nearly 2% weekly gain.

The Japanese yen was down roughly 0.7% overnight, last buying at 138.60 per dollar.

Minutes of the Fed’s November meeting released earlier this week showed that a “substantial majority” of policymakers agreed that it would “be appropriate soon” to slow the pace of interest rate hikes – remarks that led to the green card falling.

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Aggressive interest rate hikes by the Fed and market expectations of how far the central bank might take it have been a big driver of the dollar’s 10% rise this year.

“We still have a third day in a row of positive risk sentiment … I think that’s keeping the US dollar relatively subdued across the board,” said Ray Attrill, head of FX strategy at National Australia Bank.

Against a basket of currencies, the US dollar index settled at 105.94, testing last week’s three-month low of 105.30. It headed for a weekly loss of almost 1%.

Risk sentiment was also slightly helped by a survey that showed German business morale rose more than expected in November.

European Central Bank (ECB) politicians fear that inflation is taking root in the Eurozone, as the accounts of the October meeting showed overnight. However, markets are now expecting a more subdued move of 50bp at the December meeting. Read more

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The euro was 0.06% lower at $1.04045, but remained close to $1.0481, its highest level in four months last week.

“Next week we have the Eurozone inflation numbers, so I think that will be a big test of market prices … if we get another favorable surprise in that, then I think 75bp would be back on the agenda,” Attrill said.

The Aussie fell 0.17% to $0.6753 after rising more than 0.4% overnight. The kiwi slipped 0.19% to $0.6252, but that was not far off the previous session’s three-month high.

The New Zealand dollar posted a weekly gain of more than 1.5%, helped by a 75bp rate hike by the Reserve Bank of New Zealand earlier in the week and hawkish rate forecasts. Read more

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In China, markets were also closely watching banks’ reserve requirement ratio (RRR) cuts.

China will use one-time cuts in banks’ RRR, along with other monetary policy tools, to maintain relatively ample liquidity, state media reported at a cabinet meeting.

“We think the PBoC (People’s Bank of China) is likely to cut RRR by 25bp for most banks in the coming weeks (or even days),” Nomura analysts said.

“That said, the RRR is likely to have only a limited positive impact as we believe the real stumbling block for the economy lies in more zealous implementation of Covid restrictions by local officials in the absence of sufficient loanable funds.”

China’s offshore yuan was last 0.1% lower at 7.1759 per dollar.

Reporting by Rae Wee; Editing by Ana Nicolaci da Costa

Our standards: Thomson Reuters Trust principles.

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