Dollar higher but gains in check as risk appetite rebounds

The US dollar edged higher against a basket of currencies on Tuesday, shaking off some of the weakness of the previous session, but a revival in risk appetite in global financial markets kept a lid on its gains.

“Yesterday’s risk-on vibe looks to be continuing into today’s session,” said Michael Brown, head of market intelligence at payments firm Caxton in London.

“A lack of any major headlines, coupled with some semblance of fiscal stability in the UK, appear to be the culprits,” he said.

Britain’s new Finance Minister Jeremy Hunt on Monday scrapped Prime Minister Liz Truss’s economic plan, which had sapped investor confidence in Britain in recent weeks.

Relief at the U-turn prompted a rally in risk assets, including on wall Street. US stock market gains were also driven by strong corporate earnings from Goldman Sachs (GS) and Johnson & Johnson (JNJ).

The British finance minister’s decision to reverse most of the government’s “mini-budget” prompted investors to reassess the outlook for UK interest rates and sent the pound 0.4% lower on the day to USD 1.1316.

The Bank of England said on Tuesday it would go ahead with plans to start selling some of its huge stock of government bonds with the first sale due on Nov. 1, a day later than previously planned to avoid clashing with a government fiscal statement.

Last month, that market upheaval caused by the government’s now-abandoned tax-cutting mini-budget, prompted the BoE to start an emergency round of bond-buying and push back the start of its ‘quantitative tightening’ (QT) sales from Oct. 6 to Oct. 31.

Against a basket of currencies, the dollar was 0.07% higher at 112.15, having earlier slipped to a near two-week low of
111.76. The index, which fell 1% in the previous session, remains just 2% shy of the two-decade high of 114.58 touched in late September.

“With the Fed remaining one of the most hawkish G10 central banks, and downside risks to the outlook continuing to intensify … I stay bullish on the USD over the medium-term,” Caxton’s Brown said.

The dollar found some support after data showed production at US factories rising in September, led by output gains in durable and nondurable goods, indicating that the manufacturing sector remains on a reasonable footing despite the Federal Reserve’s efforts to limit demand through higher interest rates.

Meanwhile the Japanese yen traded near a 32-year trough to the dollar at 149 yen, putting the major psychological barrier of 150 in focus and raising the possibility of the Bank of Japan doing more to support the battered currency after its first yen-buying intervention since 1998 on Sept. 22.

“I think there is an expectation that they (Bank of Japan) may intervene, however authorities seem more concerned with the speed of any move rather than the level at which we trade,” Brown said.

The risk-sensitive New Zealand dollar rose about 0.63% to USD 0.5671, taking support from hotter-than-expected consumer inflation data which bolstered bets for further rate hikes.

Bitcoin was 1.9% lower at USD 19,165, clinging close to the levels it has traded at for the last four weeks.

(Reporting by Saqib Iqbal Ahmed; Editing by Ken Ferris and Nick Zieminski)