The dollar hit its highest in over two weeks on Wednesday, extending a rally as chatter about the possibility of higher U.S. interest rates and a sell-off in tech stocks soured risk sentiment to the benefit of the safe-haven currency.
The dollar’s bounce on Tuesday put pressure on the euro, which dropped once again below the $1.20 mark on Wednesday and breached important chart support in the $1.1995/1.2000 area. It hit its lowest against the buck in over two weeks, down 0.2% on the day.
The dollar index, which measures the greenback against a basket of peer currencies, rose as high as 91.436, its highest since April 19.
The bounce was partly sparked by comments from U.S. Treasury Secretary Janet Yellen that rate hikes may be needed to stop the economy overheating.
Yellen later downplayed their importance, but even the slightest mention of U.S. tightening has an outsized impact in markets that have become so dependent on monetary stimulus.
The effect was apparent in large-cap tech stocks, which suffered hefty losses overnight, dragging the Nasdaq down 1.88%.
“The markets may be tempted to do some ‘yellen and screaming’ after last night’s episode, following the apparent hawkish comments by the U.S. Treasury secretary and the subsequent backtracking,” said Valentin Marinov, head of G10 FX research at Credit Agricole.
“All that said, the comments do highlight that there is now an ongoing debate among the U.S. officials about the need to curb the Fed’s ultra-aggressive monetary stimulus.”
So far, Federal Reserve Chair Jerome Powell has argued the labour market is still far short of where it needs to be to start talking of tapering asset buying.
That position could be tested on Friday should the April payrolls report be as strong as some are suggesting. The median forecast is for a rise of 978,000, but estimates stretch as high as 2.1 million.
Three more Fed officials are speaking later on Wednesday providing the opportunity for further market-moving comments.
Westpac analysts pointed to expectations for a blockbuster payrolls number as a factor helping the dollar build a base.
“The Fed’s more influential dovish core will have the last word, but that won’t stop more hawkish regional Fed presidents from producing the odd tapering headline,” they said in a note, adding the dollar index’s uptrend could go as far as 92 if payrolls beat the lofty expectations.
Europe’s reopening and pick up in the pace of vaccinations could limit the dollar’s gains, they wrote.
Trading was limited in Asia with Japan and China on holiday, but the New Zealand dollar blipped higher to $0.7170 when local jobs data proved strong than expected.
The U.S. dollar inched higher against the yen to 109.41 and again needs to break resistance at 109.61 to encourage more speculative bids.
Sterling traded flat at $1.3895 a day ahead of the Bank of England meeting, where it is expected by some to announce a tapering of its bond-buying programme.
Reporting by Ritvik Carvalho; additional reporting by Wayne Cole in Sydney and Vidya Ranganathan in Singapore. Editing by Mark Potter