Dollar buoyant; markets jubilant as inflation risks unwind

SINGAPORE, Feb 3 (Reuters) – The euro and sterling slipped against the dollar on Friday as markets took a dovish cue from policymakers at the European Central Bank and the Bank of England, who said inflationary pressures in their economies have become more manageable.

Reversing its losses earlier in the week, the greenback strengthened against a basket of currencies, as the US dollar index rose 0.02% to 101.81, to move away from Wednesday’s nine-month low of 100.80.

The pound slid to a more than two-week trough of USD 1.2203 in Asia trade and was last 0.04% lower at USD 1.2219. It had fallen 1.2% in the previous session, its largest daily decline in a month.

The euro edged 0.12% down to USD 1.0897, after tumbling 0.7% on Thursday to move further away from its 10-month peak of USD 1.1034.

On Thursday, the ECB and BoE each raised interest rates by 50 basis points as expected, with the latter signaling the tide was turning in its battle against high inflation.

While the ECB explicitly alluded to at least one more hike of the same magnitude next month and reaffirmed its commitment in battling high inflation, President Christine Lagarde acknowledged the euro zone outlook had become less worrisome for growth and inflation.

“The ECB was a little bit more dovish than markets had previously expected … (while) the Bank of England has given a small hint that they might be close to finishing their tightening cycle,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Remarks from the ECB and the BoE came a day after Federal Reserve Chair Jerome Powell had triggered a heavy sell-off of the dollar by telling a news conference after the Fed’s 25bp rate hike that the “disinflationary” process in the United States appeared to be underway.

Friday’s nonfarm payrolls report will be the next major test of the Fed’s fight against inflation. Signs are still pointing to a tight labor market, with the number of Americans filing new claims for unemployment benefits dropping to a nine-month low last week.

In other currencies, the Aussie fell 0.11% to USD 0.7068, having lost 0.86% on Thursday, while the kiwi gained 0.05% to USD 0.6479.

The comments from policymakers following a slew of central bank meetings this week have markets seizing on signs that interest rates could be close to peaking in most major economies.

“We’re starting to see central banks converging to a pattern now … the major central banks are definitely approaching the end of their tightening cycles,” said CBA’s Kong.

An imminent peak in US rates has provided some relief for the Japanese yen, which last year crumbled under pressure from rising interest rate differentials against Japan’s low interest rate environment.

The yen was last 0.1% higher at 128.54 per dollar and was headed for a weekly gain of 1%, reversing two straight weeks of decline.

Bank of Japan (BOJ) Governor Haruhiko Kuroda said on Friday he expected wages to rise “quite significantly”, but maintained his stance on sticking with the BOJ’s ultra-loose monetary policy to support the economy.

(Reporting by Rae Wee; Editing by Lincoln Feast and Simon Cameron-Moore)